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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 20-F
 o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934
 OR
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 for the transition period from            to
 Commission File Number 333-11910
 
 MAXCOM TELECOMUNICACIONES, S.A. DE C.V.
  MAXCOM TELECOMMUNICATIONS, INC.
 UNITED MEXICAN STATES
 
 Guillermo Gonzalez Camarena No. 2000
Colonia Centro de Ciudad Santa Fe
Mexico, D.F. 01210
 
 Securities registered or to be registered pursuant to Section 12(b) of the Act:
  Securities registered or to be registered pursuant to Section 12(g) of the Act:
  Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
 3 4
 Indicate the number of outstanding shares of each of the issuers classes of capital or common
stock as of the close of the period covered by the annual report.
 Series A shares, no par value, common voting stock
    
    
    4,508,644Series A-1 shares, no par value, common voting stock with preferred liquidation rights
    
    
    6,088,896Series B-1 shares, no par value, common voting stock with preferred liquidation rights
    
    
    10,181,950Series N shares, no par value, without voting rights
    
    
    8,861,834Series N-1 shares, no par value, preferred stock with limited voting rights
    
    
    220,714,874Series N-2 shares, no par value, preferred stock with limited voting rights
    
    
    26,867,820
 Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act
 YES o NO þ
 If this report is an annual or transition report, indicate by checkmark if the registrant is not
required to file reports to Section 13 or
15 (d) of the Securities Exchange Act of 1934
 YES o NO þ
 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
 Yes þ No o
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or
an non-accelerated filer. See definition of accelerated and large accelerated filer in Rule 12b-2
of the Exchange Act (Check one)
 Large accelerated filero
    
    Accelerated filero
    
    Non-accelerated filerþ
 Indicate by check mark which financial statement item the registrant has elected to follow:
 Item 17 o Item 18 þ
 If this is an annual report, indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act)
 YES o NO þ




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##### 



TABLE OF CONTENTS
 Page
 PART I
    
    
    1ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
    
    
    1ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
    
    
    1ITEM 3. KEY INFORMATIONEXCHANGE RATES
    
    
    4ITEM 4. INFORMATION ON THE COMPANY
    
    
    14ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    40ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    71ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    77ITEM 8. FINANCIAL INFORMATION
    
    
    83ITEM 9. THE OFFER AND LISTING
    
    
    83ITEM 10. ADDITIONAL INFORMATION
    
    
    84PART II
    
    
    117ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    117ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    118PART III
    
    
    118ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
    
    
    118ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND
USE OF PROCEEDS
    
    
    118ITEM 15. CONTROLS AND PROCEDURES
    
    
    118ITEM 16.
    
    
    119PART IV
    
    
    121ITEM 17. FINANCIAL STATEMENTS
    
    
    121ITEM 18. FINANCIAL STATEMENTSITEM 19. EXHIBITS
    
    
    E-1GLOSSARY OF TELECOMMUNICATIONS TERMS
    
    
    G-1EX-4.AA: CREDIT AGREEMENTEX-4.BB: CREDIT AGREEMENTEX-4.CC: CREDIT AGREEMENTEX-4.DD: IRREVOCABLE TRUST AGREEMENTEX-4.EE: MAXCOM SHAREHOLDERS MEETINGEX-4.FF: STOCK PURCHASE AGREEMENTEX-11: MAXCOM'S CODE OF ETHICSEX-12.1: CERTIFICATIONEX-12.2: CERTIFICATIONEX-13.1: CERTIFICATIONEX-13.2: CERTIFICATIONEX-99.1: COMPUTATION OF EARNINGS PER SHAREEX-99.2: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES




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
    
    competition in local services, data, Internet and VoIP services;
    
    our ability to service our debt;
    
    limitations on our access to sources of financing on competitive terms;
    
    significant economic or political developments in Mexico and the U.S.;
    
    changes in our regulatory environment, particularly developments affecting the
regulation of the telecommunications industry;
    
    our need for substantial capital;
    
    general economic conditions, including the economic slow-down in the U.S.;
    
    the global telecommunications downturn;
    
    performance of financial markets and thus our ability to refinance our financial
obligations when they come due;
    
    our history of operating losses;
    
    the risks associated with our ability to implement our growth strategy;
    
    customer attrition;




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
    
    technological innovations;
    
    currency exchange rates, including the Mexican Peso  U.S. dollar exchange rate;
    
    changes in the policies of central banks and/or foreign governments.




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##### Table of Contents



PART I
 
 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
  
 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
  
 ITEM 3. KEY INFORMATION
 A. Selected financial data
   1




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As of the year ended December 31,2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2005(2)(unaudited)Thousands of constant December 31, 2005 pesosand thousands of U.S. dollars, except for shares and per share data(1)Statement of Operations Data:Mexican GAAPNet revenues
    
    Ps.
    375,572
    
    
    Ps.
    605,712
    
    
    Ps.
    832,212
    
    
    Ps.
    897,149
    
    
    Ps.
    1,150,472
    
    
    $
    108,229Operating costs and expenses:Network operating costs
    
    
    179,716
    
    
    
    235,175
    
    
    
    298,986
    
    
    
    316,606
    
    
    
    383,765
    
    
    
    36,102Selling, general and
administrative
    
    
    513,620
    
    
    
    484,544
    
    
    
    419,018
    
    
    
    386,871
    
    
    
    468,270
    
    
    
    44,052Depreciation and amortization
    
    
    320,723
    
    
    
    358,906
    
    
    
    365,411
    
    
    
    346,045
    
    
    
    281,636
    
    
    
    26,494Total operating costs and
expenses
    
    
    1,014,060
    
    
    
    1,078,625
    
    
    
    1,083,415
    
    
    
    1,049,522
    
    
    
    1,133,671
    
    
    
    106,648Operating (loss) gain
    
    
    (638,488
    )
    
    
    (472,913
    )
    
    
    (251,203
    )
    
    
    (152,373
    )
    
    
    16,801
    
    
    
    1,581Integral cost (income) of
financing:Interest expense
    
    
    510,049
    
    
    
    234,674
    
    
    
    32,854
    
    
    
    28,915
    
    
    
    83,069
    
    
    
    7,815Interest income
    
    
    (91,706
    )
    
    
    (5,054
    )
    
    
    (4,544
    )
    
    
    9,818
    
    
    
    14,054
    
    
    
    1,322Gain on repurchase of debt
Exchange loss (gain), net
    
    
    (108,455
    )
    
    
    233,511
    
    
    
    188,186
    
    
    
    1,451
    
    
    
    (19,973
    )
    
    
    (1,879
    )Gain on net monetary position
    
    
    (98,742
    )
    
    
    (113,718
    )
    
    
    (82,781
    )
    
    
    (89,041
    )
    
    
    (22,090
    )
    
    
    (2,078
    )Total integral cost of
financing
    
    
    66,298
    
    
    
    349,413
    
    
    
    133,715
    
    
    
    (48,857
    )
    
    
    55,060
    
    
    
    5,180Nonrecurring charges
    
    
    74,322Other income (expense), net
    
    
    (212
    )
    
    
    2,987
    
    
    
    164
    
    
    
    818
    
    
    
    (8,991
    )
    
    
    (846
    )Special item
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,365Asset tax and income tax
    
    
    
    
    
    
    8,756
    
    
    
    14,033
    
    
    
    28,969
    
    
    
    26,606
    
    
    
    2,503Net (loss) gain
    
    
    (780,216
    )
    
    
    (828,095
    )
    
    
    (399,115
    )
    
    
    (133,303
    )
    
    
    (71,239
    )
    
    
    (6,702
    )Net (loss) gain per share, basic
    
    
    (56.75
    )
    
    
    (59.64
    )
    
    
    (27.24
    )
    
    
    (9.00
    )
    
    
    (5.33
    )
    
    
    (0.50
    )Weighted-average shares
outstanding
    
    
    13,748,445
    
    
    
    13,885,006
    
    
    
    14,654,063
    
    
    
    14,806,980
    
    
    
    13,370,478
    
    
    
    13,370,478U.S. GAAPOperating
(loss) gain
    
    
    (635,461
    )
    
    
    (531,639
    )
    
    
    (286,124
    )
    
    
    (199,864
    )
    
    
    (5,457
    )
    
    
    (513
    )Net (loss) gain
    
    
    (777,299
    )
    
    
    (394,101
    )
    
    
    (411,653
    )
    
    
    1,221,900
    
    
    
    171,922
    
    
    
    16,173Net (loss) gain per share
    
    
    (56.54
    )
    
    
    (28.38
    )
    
    
    (28.09
    )
    
    
    82.52
    
    
    
    12.86
    
    
    
    1.21Balance Sheet Data:Mexican GAAPCash and cash equivalents
    
    Ps.
    206,171
    
    
    Ps.
    130,7951
    
    
    Ps.
    45,3667
    
    
    Ps.
    62,189
    
    
    Ps.
    223,423
    
    
    $
    21,018Restricted cash
    
    
    223,158
    
    
    
    
    
    
    
    
    
    
    
    5,740Working capital(3)
    
    
    (45,177
    )
    
    
    (20,337
    )
    
    
    14,455
    
    
    
    (200,727
    )
    
    
    (32,222
    )
    
    
    (3,031
    )Restricted cash to long term
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,105
    
    
    
    7,672
    
    
    
    722Frequency rights, net
    
    
    125,237
    
    
    
    118,013
    
    
    
    104,644
    
    
    
    97,419
    
    
    
    86,102
    
    
    
    8,100Telephone network systems and
equipment, net
    
    
    1,635,273
    
    
    
    1,794,949
    
    
    
    1,671,129
    
    
    
    1,783,834
    
    
    
    2,082,795
    
    
    
    195,936Preoperating expenses, net
    
    
    265,028
    
    
    
    230,986
    
    
    
    195,247
    
    
    
    158,607
    
    
    
    122,305
    
    
    
    11,506Intangible assets, net
    
    
    357,822
    
    
    
    481,374
    
    
    
    424,859
    
    
    
    378,330
    
    
    
    303,527
    
    
    
    28,554Retirement obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,798
    
    
    
    1,392Rent deposits and other assets
    
    
    37,403
    
    
    
    33,445
    
    
    
    30,607
    
    
    
    21,612
    
    
    
    10,501
    
    
    
    988Total assets
    
    
    2,996,788
    
    
    
    2,992,776
    
    
    
    2,687,662
    
    
    
    2,752,445
    
    
    
    3,159,718
    
    
    
    297,245Long-term liabilities
    
    
    2,914,663
    
    
    
    2,085,728
    
    
    
    2,200,572
    
    
    
    710,659
    
    
    
    883,555
    
    
    
    83,119Total liabilities
    
    
    3,224,967
    
    
    
    2,314,163
    
    
    
    2,407,043
    
    
    
    1,115,285
    
    
    
    1,375,872
    
    
    
    129,433Capital stock
    
    
    1,166,059
    
    
    
    1,905,012
    
    
    
    1,905,012
    
    
    
    2,500,957
    
    
    
    2,744,607
    
    
    
    258,194Additional paid-in capital
    
    
    122,220
    
    
    
    474
    
    
    
    1,596
    
    
    
    895,494
    
    
    
    219,622
    
    
    
    20,661Accumulated deficit
    
    
    (1,516,455
    )
    
    
    (1,226,873
    )
    
    
    (1,625,988
    )
    
    
    (1,759,291
    )
    
    
    (1,180,383
    )
    
    
    (111,043
    )Shareholders equity (deficit)
    
    
    (228,179
    )
    
    
    678,613
    
    
    
    280,619
    
    
    
    1,637,160
    
    
    
    1,783,846
    
    
    
    167,812
 2




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As of the year ended December 31,2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2005(2)(unaudited)Thousands of constant December 31, 2005 pesosand thousands of U.S. dollars, except for shares and per share data(1)U.S. GAAPLong-term liabilities
    
    
    2,914,663
    
    
    
    1,715,619
    
    
    
    1,853,347
    
    
    
    479,570
    
    
    
    701,082
    
    
    
    65,953Shareholders equity
    
    Ps.
    (480,864
    )
    
    Ps.
    (3,132
    )
    
    Ps.
    (413,663
    )
    
    Ps.
    1,010,743
    
    
    Ps.
    1,182,664
    
    
    $
    111,257Other Financial Data:Mexican GAAPCapital expenditures(4)
    
    
    617,431
    
    
    
    596,903
    
    
    
    136,267
    
    
    
    359,358
    
    
    
    347,768
    
    
    
    32,716Ratio of earnings to fixed
charges(5)
    
    
    (2.45
    )
    
    
    (0.39
    )
    
    
    (0.48
    )
    
    
    (2.25
    )
    
    
    (2.61
    )
    
    
    (2.61
    )Cash flow (used in) provided by
operating activities
    
    
    (402,070
    )
    
    
    (384,425
    )
    
    
    (51,212
    )
    
    
    276,715
    
    
    
    267,790
    
    
    
    25,192Cash flow provided (used in) by
financing activities
    
    
    (111,676
    )
    
    
    905,950
    
    
    
    102,051
    
    
    
    99,467
    
    
    
    96,259
    
    
    
    9,055Cash used in investing
activities
    
    
    (617,431
    )
    
    
    (596,903
    )
    
    
    (136,267
    )
    
    
    (359,358
    )
    
    
    (347,768
    )
    
    
    (32,716
    )U.S. GAAPCash (used in) provided by
operating
activities
    
    Ps.
    (434,378
    )
    
    Ps.
    (213,658
    )
    
    Ps.
    18,585
    
    
    Ps.
    123,397
    
    
    Ps.
    468,590
    
    
    $
    44,082Cash provided (used in) by
financing
activities
    
    
    (44,293
    )
    
    
    689,405
    
    
    
    0
    
    
    
    179,155
    
    
    
    141,171
    
    
    $
    13,280Cash used in investing activities
    
    
    (597,304
    )
    
    
    (458,460
    )
    
    
    (70,709
    )
    
    
    (247,547
    )
    
    
    (441,745
    )
    
    
    (41,556
    )
 Notes to Selected Historical Consolidated Financial Information
 (1)
    
    Pursuant to Mexican GAAP, financial data for all periods in the financial statements have,
unless otherwise indicated, been restated in constant pesos as of December 31, 2005.
Restatement into December 31, 2005 pesos is made by multiplying the relevant nominal peso
amount by the inflation index for the period between the end of the period to which such
nominal peso amount relates and December 31, 2005. The inflation index used in this annual
report for 2001 figures is 1.2070, for 2002 figures is 1.1561, for 2003 figures is 1.0397, for
2004 is 1.0519 and for 2005 is 1.0333.
 (2)
    
    Peso amounts were converted to U.S. dollars at the exchange rate of Ps.10.63 per U.S.$1.00
reported by the Federal Reserve Bank of New York as its noon buying rate for pesos on December
30, 2005. Such conversions are for the convenience of the reader and should not be construed
as representations that the peso amounts actually represent such U.S. dollar amounts or could
be converted into U.S. dollars at the rate indicated, or at all.
 (3)
    
    Working capital is defined as current assets (excluding cash and cash equivalents and
restricted cash) less current liabilities (excluding current maturities of long-term debt,
which includes interest payable).
 (4)
    
    Capital expenditures include frequency rights, telephone network systems and equipment,
intangible assets and other assets. Investing activities in the consolidated statements of
changes in financial position are net of dispositions.
 (5)
    
    Our earnings have been insufficient to cover fixed charges since we started incurring debt in 1998.
Fixed charges include interest expense, capitalized interest and the portion of operating lease
rental expense that represents the interest factor. The fixed charge coverage deficiency for the
years ended December 31, 2001, 2002, 2003, 2004 and 2005 amounted to Ps.786.1 million, Ps.820.3 million, Ps.385.1 million,
Ps.121.4 million, and Ps.45.0 million, respectively.
 3




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EXCHANGE RATES
  Noon Buying Rate(1)Period End
    
    Average(2)
    
    High
    
    Low2001
    
    
    9.16
    
    
    
    9.326
    
    
    
    9.97
    
    
    
    8.952002
    
    
    10.43
    
    
    
    9.745
    
    
    
    10.43
    
    
    
    9.002003
    
    
    11.24
    
    
    
    10.846
    
    
    
    11.41
    
    
    
    10.112004
    
    
    11.15
    
    
    
    11.309
    
    
    
    11.63
    
    
    
    10.802005
    
    
    10.63
    
    
    
    10.868
    
    
    
    11.41
    
    
    
    10.41December 2005
    
    
    
    
    
    
    
    
    
    
    10.77
    
    
    
    10.41January 2006
    
    
    
    
    
    
    
    
    
    
    10.64
    
    
    
    10.44February 2006
    
    
    
    
    
    
    
    
    
    
    10.53
    
    
    
    10.43March 2006
    
    
    
    
    
    
    
    
    
    
    10.95
    
    
    
    10.46April 2006
    
    
    
    
    
    
    
    
    
    
    11.16
    
    
    
    10.86May 2006
    
    
    
    
    
    
    
    
    
    
    11.31
    
    
    
    10.84
 
 (1)
    
    Source: Federal Reserve Bank of New York.(2)
    
    Represents the average rates for each period indicated, calculated by using the average of
the exchange rates on the last day of each month during the period. B.
    
    Capitalization and indebtednessNot applicable.C.
    
    Reasons for offer and use of proceedsNot applicable.D.
    
    Risk factors
 Factors relating to Maxcom
 We anticipate that we will have negative operating cash flow until we develop a sufficiently large
customer base
  4




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We expect to incur net losses through at least 2006
  We may need additional financing
  We may be unable to build out our network in a timely manner or without undue cost
  
    
    our inability to obtain permits to use public rights of way;
    
    our inability to obtain future financing necessary for such buildout;
    
    unforeseen delays, costs or impediments relating to the granting of state and
municipal permits for our buildout;
    
    delays or disruptions resulting from physical damage, power loss, defective
equipment or the failure of third-party suppliers or contractors to meet their
obligations in a timely and cost-effective manner; and
    
    regulatory and political risks relating to Mexico, such as the temporary seizure or
permanent expropriation of assets, import and export controls, political instability,
changes in the regulation of telecommunications and any future restrictions on the
repatriation of profits or on foreign investment.
  We have experienced significant turnover in our executive ranks, which has affected our ability to
develop and execute our business strategies
   5




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We may not have sufficient administrative, operational or financial resources to grow as rapidly as
we would like
  We depend on Telmex for interconnection
  Our high leverage could affect our ability to service our debt
    6




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
    
    our ability to fund capital expenditures, acquisitions or operating losses or to
refinance existing indebtedness;
    
    our flexibility in planning for, or reacting to, changes in our business and market
conditions; and
    
    our ability to compete in our markets.
 We are and will be subject to restrictive covenants
  
    
    borrow money;
    
    pay dividends on our capital stock;
    
    purchase stock or repay subordinated indebtedness;
    
    make investments;
    
    restrict the ability of our subsidiaries to pay dividends;
    
    use assets as security in other transactions;
    
    sell assets; and
    
    consolidate or merge into other companies.
  We may not be able to finance an exit transaction repurchase
  If we do not successfully upgrade and operate accounting, billing, customer service and management
information systems, we may not be able to achieve desired operating efficiencies
  Our operations are dependent upon our ability to protect and maintain our network infrastructure
  7




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We could be negatively affected by the by-pass traffic
 Comisión Federal de
Telecomunicaciones
   Our telecommunications network infrastructure has several vulnerabilities and limitations
  
    
    physical damage;
    
    power loss;
    
    capacity limitations;
    
    software defects as well as hardware and software obsolescence;
    
    breaches of security, whether by computer virus, break-in or otherwise;
    
    denial of access to our sites for failure to obtain required municipal or other
regulatory approvals; and
    
    other factors which may cause interruptions in service or reduced capacity for our
customers.
  8




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Our results are negatively impacted by high levels of churn
  
    
    our customer delinquency;
    
    our limited coverage area that restricts our ability to continue providing service
when a customer moves;
    
    our failure to meet service levels required by our customers;
    
    promotional and pricing strategies of our competitors; and
    
    economic conditions in Mexico.
   Factors relating to the Mexican telecommunications industry
 We face significant increasing competition, which may negatively affect our operating margins
      9




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##### Table of Contents



If the Mexican government grants more concessions, the value of our concessions could be severely impaired
  We could lose our concessions if we do not comply fully with their terms
  Secretaría de Comunicaciones y Transportes
 Fraud increases our expenses
   The technology we use may be made obsolete by the technology used by our competitors
  10




---



##### Table of Contents



The Mexican government could temporarily seize or permanently expropriate our assets under certain circumstances
  As a result of technological and regulatory changes, we may face additional competition in the
future from new market participants, which may result in lower prices for telecomminications
services, less margins, and/or a loss of market share
    If a Long Distance Calling Party pays system is implemented in Mexico, it could increase our
costs and result in a loss of traffic
  Factors relating to Mexico
 If Mexico experiences future political and economic crises, our business could be affected
negatively
  Partido Acción Nacional
 11




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##### Table of Contents



Partido
Revolucionario Institucional
    Changes in tax or other regulations could have an adverse impact on our financial condition
 Ley del Impuesto Especial Sobre Producción y Servicios
   Foreign ownership restrictions limit our ability to raise equity capital
   12




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##### Table of Contents



We may lose money because of peso devaluations
   3 4 3 4
 Developments in other countries may impact the price of our securities
 3 4 3 4
 Our financial statements do not give you the same information as financial statements prepared under United States accounting principles
  13




---



##### Table of Contents



You may suffer a U.S. dollar shortfall if you obtain a judgment against us or a distribution in bankruptcy
  Banco de México Diario Oficial de la Federación
 concurso mercantil 3 4
 We may not be able to make payments in U.S. dollars
  High inflation rates in Mexico may decrease demand for our services while increasing our costs
  
    
    inflation can adversely affect consumer purchasing power, thereby adversely
affecting consumer demand for our services and products; and
    
    to the extent inflation exceeds our price increases, our prices and revenues will be
adversely affected in real terms.
 High interest rates in Mexico could increase our financing costs
  
 ITEM 4. INFORMATION ON THE COMPANY
 A. History and development of the Company
 sociedad anónima de
capital variable
 14




---



##### Table of Contents



B. Business overview
    15




---



##### Table of Contents




    
    prices that are between 5% to 15% below current market levels;
    
    one-stop-shopping service, such as our all-in-one-bill feature (which allows our
customers to receive a single invoice containing all local, long distance, data and
Internet services together); and
    
    state-of-the-art call center equipped with Customer Relationship Management Program
(also known as CRM) application software to receive all customer inquiries including
around-the-clock customer care availability.
 Strategy
  Capture unmet demand for telephony services
  16




---



##### Table of Contents



Build our network on a demand-driven, modular basis
    Differentiate product offerings based on features and price
  Deploy cost-efficient technology
   Capitalize on our nationwide local telephony concession
    17




---



##### Table of Contents



Our markets
 Concession areas
      18




---



##### Table of Contents



Clusters and single sites
   
    
    Identify clustersthrough market research. Our market research is designed to
identify small- and medium-sized businesses and residential customers. Once we
identify potential customers within the clusters, according to the marketing sales
forecast we design the deployment of the access network to cover them. We perform a
return on investment analysis for each cluster to assure that the investment made in
such cluster meets our return benchmarks.
    
    Deploy clustersthrough the implementation of a sales plan for each cluster based on
our network deployment schedule. We promote our services at the same time that we
build our network.
    
    Fill in clustersby offering our services to all customers within the cluster.
  Our network
 Buildout strategy
   Network backbone
  19




---



##### Table of Contents



Last-mile connectivity
    Switching
   20




---



##### Table of Contents



Operational support systems
   
    
    offer a flexible, large selection of services;
    
    provide tailored service packages;
    
    quickly introduce products and services;
    
    deliver near real-time activation and disconnection;
    
    deliver a high quality of service;
    
    minimize activation errors; and
    
    provide accurate and timely billing services.
  
    
    Spanish language support for invoices and documentation;
    
    a high degree of integration between all operational support systems components;
    
    flow-through of information, provisioning and service activation;
    
    capabilities to monitor, manage and resolve network problems;
    
    allowance for growth on a modular scalable basis; and
    
    support of administrative operations for financial controls.
 21




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##### Table of Contents



Data Center
  Mediation and Provisioning Operational Support Systems
   Service Management Operational Support Systems
  
    
    Order Management & Service Provisioning: manages the service delivery process,
involving different transactions across our functional areas.
    
    Workflow management: provides the capability to maintain provisioning plans, which
are groups of tasks needed to manage the flow of work and information.
    
    Network Inventory and Design Management: brings together the geographical, physical,
electrical, and logical dimensions of the network into a single view supported by a set
of integrated equipment administration and network design modules, also is able to
manage all number and IP addresses inventory.
    
    Trouble Management & Escalation.
   Business Management Operational Support Systems
  22




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##### Table of Contents



Administrative System
  Our services
   Service products
  
    
    LineaMax Residencial.This is a service for residential customers that provides a
high-quality telephone line. The features offered under this product include voice
mail, call waiting, call forwarding, three-way calling, call blocking, speed dialing
and unlisted numbers.
    
    LineaMax Comercial.This service, which is offered to business customers, is
identical to LineaMax Residencial, except that it also includes multi-line hunting.
    
    CentralMax.This service provides business customers with all the functions of a
private branch exchange using centrex technology, without having to acquire and
maintain equipment. The features offered under this product include call waiting, call
forwarding, three-way calling, direct inward dialing, direct outward dialing, intercom
dialing, call transfer, speed dialing, call hold, call pick up, outgoing call blocking,
single digit access to attendant and distinctive ringing. Optional solutions include
voice mail, music-on-hold, multi-line hunting and operator services.
    
    Larga Distancia Max.This service provides domestic and international long
distance. We do not offer our long distance service separately from our local
telephony service. See Supervision and Regulation of the Mexican Telecommunication
IndustryOur concessionsLong distance for a description of significant special
charges we would have to pay Telmex if we decide to provide long distance service to
customers other than our local telephony customers.
    
    TroncalMax Digital.This service provides digital trunks for business customers
that need highly reliable access to and from the public telephone network through their
existing Private Branch Exchange (also known as PBX). This service is sold in groups
of 10, 20 or 30 trunks. The groups can be configured with direct inward dial (DID),
direct outward dial (DOD), caller identification or main telephone number assignments.
    
    TroncalMax Analógica.This service, which is offered to business customers,
provides connectivity to analog PBX or key systems. The features available with this
product are multi-line hunting, caller identification and call barring.
    
    Internet Max.This service uses a traditional POTs line and modem to provide
dial-up Internet access allowing users to navigate on the Internet at speeds of up to
56 Kbps, depending on the number of users accessing the Internet at the same time, since it is a shared
service. We provide this service to customers, regardless of whether they have a
Maxcom line or not.
 23




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##### Table of Contents




    
    SpeediMax(ADSL (128, 256 and 512 Kbps and 1 and 2 Mbps)). Asymmetric Digital
Subscriber Line (also known as ADSL) is a transmission service that turns ordinary
telephone lines into high-speed data connections. It is a digital data service that
provides telecommuting capabilities at speeds much faster than standard modems. With
ADSL it is possible to have secure, dedicated links to the Internet or a companys LAN
at a high-speed transmission.
    
    AsistelMax.This service, which we launched in April 2002, provides basic telephone
medical and home assistance to our residential customers in case of emergency.
    
    1-800 Numbers.This service is available for our customers interested in receiving
toll-free calls into their call centers or businesses.
    
    Dedicated Internet Access.This service offers Internet access at high speed within
a clear channel access to the Internet backbone.
    
    Digital private lines.This service provides highly reliable dedicated circuits
between two or more physical locations. Digital private lines are designed to
integrate voice, data and video private networks over a single physical link. Digital
private lines are, in effect, leased lines for exclusive/private use with no
limitations in usage, available 365 days a year, with no restrictions in amount of
traffic.
    
    Hosted PBX.This service provides our business customers with all the functions of
an Internet Protocol PBX (or IP/PBX) using VoIP technology, without having to acquire
and maintain high cost equipment. The features offered under this product include
CentralMax as well as other Internet Protocol enhanced services such as web portal
setup, click to dial, hosted directory, MS Outlook © integration, etc.
    
    I-line.This service allows our customers to make and receive local, international
and domestic long distance and mobile calls using the Internet. This service includes
additional voice features such as: call waiting, caller ID and voice mail services
    
    E-Security.This service provides managed security including perimetral anti-virus,
content filter and spyware solutions. In this sense Maxcom supplies all the software
and hardware equipment as an integrated solution for our customers.
    
    Opportune Service to Systems.This service provides specialized engineering
equipment to supply preventive and corrective maintenance to our customers IT
equipment.
  Pricing
   24




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##### Table of Contents



Marketing and sales
 General
  Sales and distribution channels
  Our direct sales approach is to assign sales representatives or teams to locations within a cluster
or to single sites.
    Customer service
  
    
    centralized answering point.This area responds to calls to our customer care
telephone numbers in Mexico City and the cities of Puebla and Queretaro 24 hours a day,
seven days a week. Many prospective and existing customers use our centralized
answering point for all types of queries, including queries regarding area codes,
rates, billing and line installation and changes.
    
    walk-in center.We have three walk-in centers in Mexico City, three in the City of
Puebla and one in the City of Queretaro for prospective and existing customers who wish
to make inquires in person regarding our services. Our hours of operation are 9:00
a.m. to 6:00 p.m. on Mondays through Fridays and from 9:00 a.m. to 2:00 p.m. on
Saturdays.
    
    centralized trouble-shooting center.This area responds to calls in Mexico City and
the cities of Puebla and Queretaro. This center is available 24 hours a day, seven
days a week and handles technical problems, inquiries and complaints.
 25




---



##### Table of Contents



Credit, billing and collection
         Competition
   26




---



##### Table of Contents



Telmex
  Other Competitors
      27




---



##### Table of Contents



Overview of the Mexican telecommunications industry
 General
    Market liberalization
  Local telephony market.
 28




---



##### Table of Contents




    
    450 MHz, 1.9 GHz (PCS) and 3.4-3.7 GHz (fixed wireless local loop) frequency bands;
    
    7, 15, 23 and 38 GHz frequency band for nationwide point-to-point microwave
transmission links; and
    
    10.5 GHz frequency band for regional point-to-multipoint microwave transmission
service.
  Long distance telephony market.
   
    
    Alestra, S. de R.L. de C.V.;
    
    Avantel, S.A. de C.V.;
    
    Axtel, S.A. de C.V.;
    
    Iusatel, S.A. de C.V.;
    
    Marcatel, S.A. de C.V.; and
    
    Bestel, S.A. de C.V.
 29




---



##### Table of Contents



Mexican market characteristics
 Population and economic growth. Comisión Económica para América Latina y el Caribe
 Underserved telephony market. th
  Projected growth trends.
   Supervision and regulation of the Mexican telecommunications industry
 General
 Ley Federal de Telecomunicaciones Ley de Vías Generales de Comunicación Reglamento de Telecomunicaciones
 30




---



##### Table of Contents



Comisión Federal de Telecomunicaciones
 
    
    enacting regulations and technical standards for the telecommunications industry;
    
    ensuring that holders fulfill the terms of their concessions and permits;
    
    suspending operators without concessions;
    
    resolving interconnection controversies between competitors; and
    
    maintaining a registry of applicable rates.
   Concessions and permits
 General.
 
    
    the type and technical specifications of the network, system or services that may be provided;
    
    the allocated spectrum frequencies, if applicable;
    
    the geographical region in which the holder of the concession may provide the service;
    
    the required capital expenditure program;
    
    the term during which such service may be provided;
    
    the payment, where applicable, required to be made to acquire the concession,
including, where applicable, the participation of the Mexican government in the
revenues of the holder of the concession; and
    
    any other rights and obligations affecting the concession holder.
  31




---



##### Table of Contents




    
    installing, operating or exploiting transmission-ground stations; and
    
    providing telecommunications services as a reseller.
   Ownership restrictions. Ley Federal de Inversión Extranjera
 
    
    Mexican individuals; and
    
    Mexican corporations in which non-Mexicans own 49% or less of the full voting stock
and that are not otherwise controlled by non-Mexicans.
 Secretaría de Economía
  Transfer.
 Termination.
 
    
    expiration of its term;
    
    resignation by the concession holder or the permit holder;
    
    revocation. A concession or a permit may be revoked prior to the end of its
term under certain circumstances, such as:
 < failure to exercise the rights of the concession within 180 days of the
grant;< failure to provide interconnection services with other holders of
telecommunications concessions and permits without just
   cause;< loss of the concession or permit holders Mexican nationality;
 
 (1)
    
    Renewal on an annual basis. 32




---



##### Table of Contents



< unauthorized assignment, transfer or encumbrance of the concession or permit;< unauthorized interruption of service;< taking any action that impairs the rights of other concessionaires or permit holders;< failure to comply with the obligations or conditions specified in the
concession or permit; and< failure to pay to the Mexican government its fee for the concession or,
where applicable, its participation in the revenues of the
   holder of the
concession.
   
    
    expropriation. The Mexican government has the statutory right to
permanently expropriate any telecommunications concession and claim any related assets
for reasons of public interest. Under Mexican law, the Mexican government is obligated
to compensate the owner of such assets in the case of a statutory expropriation. The
amount of the compensation is to be determined by appraisers. If the party affected by
the expropriation disagrees with the appraisal amount, such party may initiate judicial
action against the government. In such a case, the relevant judicial authority will
determine the appropriate amount of compensation to be paid. We are not aware of any
instance in which the SCT has exercised its expropriation rights in connection with a
telecommunications company; and
    
    dissolution or bankruptcy of the concession holder or the permit holder.
 Temporary seizure.
 Rates for telecommunications services
   Comisión Federal de
Competencia
 33




---



##### Table of Contents



Our concessions
 Local telephony.
  
    
    basic local telephony;
    
    the sale or lease of network capacity for the generation, transmission or reception
of signs, signals, writings, images, voice, sounds or other information of any nature;
    
    the purchase and lease of network capacity from other carriers, including the lease
of digital circuits;
    
    value-added services;
    
    operator services;
    
    data, video, audio and video conference services, except for cable or other
restricted television, continuous music or digital audio;
    
    credit or debit telephone cards; and
    
    public telephony.
     34




---



##### Table of Contents



Long distance.
  
    
    the carrying of switched traffic between two different local calling areas that
requires the use of a dialing prefix for its routing;
    
    the sale or lease of network capacity for the generation, transmission or reception
of signs, signals, writings, images, voice, sounds or other information of any nature;
    
    the purchase and lease of network capacity from other carriers; and
    
    nationwide and international long distance telephony.
  
    
    those which require a concession for frequency bands of the radio electric spectrum
for specific uses;
    
    those which require a concession to occupy and exploit geostationary orbital
positions and satellite orbits assigned to Mexico;
    
    those which require a concession to operate radio or television broadcasting systems; and
    
    cable or other restricted television.
    35




---



##### Table of Contents



Microwave transmissions. Point-to-point
 
    
    two consecutive frequency segments in the 15 GHz band, with a 56 MHz bandwidth;
    
    three consecutive frequency segments in the 23 GHz band, with a 56 MHz bandwidth; and
    
    two consecutive frequency segments in the 23 GHz band, with a 100 MHz bandwidth.
     36




---



##### Table of Contents



Point-to-multipoint
     Interconnection
   Local interconnection.
  37




---



##### Table of Contents



Mobile interconnection.
  Long distance interconnection.
  Municipal and other regulatory approvals
  C. Organizational structure
 sociedad anónima de capital variable
 38




---



##### Table of Contents



39




---



##### Table of Contents



D. Property, plant and equipment
       
 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 All peso amounts discussed in this annual report are presented in constant December 31, 2005
pesos in accordance with Mexican GAAP, except as otherwise indicated. You should read the
following discussion and analysis in conjunction with the consolidated financial statements
included elsewhere in this annual report. Unless otherwise indicated, all financial information in
this annual report is presented in constant pesos as of December 31, 2005. The U.S. dollar
translations provided in this annual report are solely for the convenience of the reader and are,
unless otherwise indicated, calculated utilizing the noon buying rate at December 30, 2005, which
was Ps.10.63 per U.S.$1.00 as reported by the Federal Reserve Bank of New York. Sums may not add
due to rounding.
   40




---



##### Table of Contents




    
    net interest expense and interest income;
    
    net foreign exchange gains or losses; and
    
    net gains or losses on monetary position.
   Recent developments
   41




---



##### Table of Contents



A. Results of operations
 Overview of Maxcom
     Devaluation and inflation
  42




---



##### Table of Contents



Gross InternationalMexican GDP
    
    Reserves as of theYear ended
    
    Inflation
    
    Average
    
    Annual Growth
    
    end of each yearDecember 31
    
    Rate
    
    28-day Cetes
    
    Rate
    
    (Billion)1996
    
    
    
    27.7
    %
    
    
    31.3
    %
    
    
    5.3
    %
    
    $
    17.51997
    
    
    
    15.7
    %
    
    
    19.8
    %
    
    
    6.8
    %
    
    $
    28.01998
    
    
    
    18.6
    %
    
    
    24.6
    %
    
    
    4.9
    %
    
    $
    30.11999
    
    
    
    12.3
    %
    
    
    21.3
    %
    
    
    3.9
    %
    
    $
    30.72000
    
    
    
    9.0
    %
    
    
    15.3
    %
    
    
    6.6
    %
    
    $
    35.62001
    
    
    
    4.4
    %
    
    
    11.3
    %
    
    
    -2.0
    %
    
    $
    44.82002
    
    
    
    5.7
    %
    
    
    7.1
    %
    
    
    0.8
    %
    
    $
    50.72003
    
    
    
    4.0
    %
    
    
    6.2
    %
    
    
    1.4
    %
    
    $
    59.02004
    
    
    
    5.2
    %
    
    
    6.8
    %
    
    
    4.2
    %
    
    $
    64.22005
    
    
    
    3.3
    %
    
    
    9.2
    %
    
    
    3.0
    %
    
    $
    74.1
  
    
    the increase in the peso-carrying costs of our U.S. dollar-denominated debt and
capital expenditure requirements;
    
    the ensuing decrease in the purchasing power of Mexican consumers, which results in
a decrease in the demand for telephony services; and
    
    our inability, due to competitive pressures, to increase our prices in line with
inflation.
 3 4
 Impact of foreign currency fluctuations
  43




---



##### Table of Contents



Capitalization of pre-operating expenses
   Customer attrition (churn)
   Year ended
    
    Average monthlyDecember 31
    
    Churn rate2002
    
    
    
    2.98
    %2003
    
    
    
    2.62
    %2004
    
    
    
    2.01
    %2005
    
    
    
    1.82
    %
 44




---



##### Table of Contents



Voice, data and wholesale revenues
  
    
    installation charges of voice lines;
    
    monthly fees for the rental of voice lines, which include, depending on the product,
a certain number of free local calls;
    
    usage charges of voice lines, which can be local calls above those already included
in the monthly fees, long distance minutes, as well as minutes to mobile numbers under
the Calling Party Pays modality;
    
    charges relating to value-added services such as voice mail, call waiting, call
forwarding, three-way calling and caller identification;
    
    interconnection fees; and
    
    the sale of telephone sets.
    Average Revenue Per User (ARPU)
   Useful lives of fixed assets
  45




---



##### Table of Contents



Spin-off
of the Company and sale of subsidiary
   Results of operations
  46




---



##### Table of Contents



Year ended December 312005
    
    
    2004
    
    
    2003Net revenues
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Operating cost and expenses:Network operating costs
    
    
    33
    %
    
    
    35
    %
    
    
    36
    %Selling, general and administrative expenses
    
    
    41
    %
    
    
    43
    %
    
    
    50
    %Depreciation and amortization
    
    
    25
    %
    
    
    39
    %
    
    
    44
    %Total operating cost and expenses
    
    
    99
    %
    
    
    117
    %
    
    
    130
    %Operating gain (loss)
    
    
    1
    %
    
    
    (17
    %)
    
    
    (30
    %)Integral income (cost) of financing
    
    
    (5
    %)
    
    
    5
    %
    
    
    16
    %Nonrecurring charges
    
    
    1
    %
    
    
    0
    %
    
    
    0
    %Other income (expense), net
    
    
    1
    %
    
    
    0
    %
    
    
    0
    %Taxes
    
    
    2
    %
    
    
    3
    %
    
    
    2
    %Net loss
    
    
    6
    %
    
    
    15
    %
    
    
    48
    %
  Year Ended December 31,
    
    
    
    
    
    
    Percentage Change2005
    
    
    2004
    
    
    2003
    
    
    2005/2004
    
    
    2004/2003(In Millions)Net revenues
    
    Ps.
    1,150.5
    
    
    Ps.
    897.1
    
    
    Ps.
    832.2
    
    
    
    28.2
    %
    
    
    7.8
    %Operating cost and expenses:Network operating costs
    
    
    (383.8
    )
    
    
    (316.6
    )
    
    
    (299.0
    )
    
    
    21.2
    %
    
    
    5.9
    %Selling, general and
administrative expenses
    
    
    (468.3
    )
    
    
    (386.9
    )
    
    
    (419.0
    )
    
    
    21.0
    %
    
    
    -7.7
    %Depreciation and amortization
    
    
    (281.6
    )
    
    
    (346.0
    )
    
    
    (365.4
    )
    
    
    -18.6
    %
    
    
    -5.3
    %Total operating cost and
expenses
    
    Ps.
    (1,133.7
    )
    
    Ps.
    (1,049.5
    )
    
    Ps.
    (1,083.4
    )
    
    
    8.0
    %
    
    
    -3.1
    %Operating gain (loss)
    
    Ps.
    16.8
    
    
    Ps.
    (152.4
    )
    
    Ps.
    (251.2
    )
    
    
    -111.0
    %
    
    
    -39.3
    %Integral income (cost) of financing
    
    
    (55.1
    )
    
    
    48.9
    
    
    
    (133.7
    )
    
    
    -212.7
    %
    
    
    -136.6
    %Nonrecurring charges
    
    
    (15.4
    )
    
    
    0.0
    
    
    
    0.0
    
    
    
    n/a
    
    
    
    n/aOther income (expense), net
    
    
    9.0
    
    
    
    (0.8
    )
    
    
    (0.2
    )
    
    
    -1225.0
    %
    
    
    300.0
    %Taxes
    
    
    (26.6
    )
    
    
    (29.0
    )
    
    
    (14.0
    )
    
    
    -8.3
    %
    
    
    107.1
    %Net loss
    
    Ps.
    (71.3
    )
    
    Ps.
    (133.3
    )
    
    Ps.
    (399.1
    )
    
    
    -46.5
    %
    
    
    -66.6
    %
 Year ended December 31, 2005 compared to year ended December 31, 2004
 Net revenues
   47




---



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Year ended December 312005
    
    
    2004(in millions)Voice
    
    Ps.
    930.2
    
    
    Ps.
    739.4Data
    
    
    51.4
    
    
    
    43.2Wholesale
    
    
    168.9
    
    
    
    114.6Total revenues
    
    Ps.
    1,150.5
    
    
    Ps.
    897.2
  ARPU2005
    
    
    2004
    
    
    %(in U.S. dollars)BusinessMonthly charges
    
    $
    22.3
    
    
    $
    22.9
    
    
    
    (2
    )%Usage
    
    
    53.9
    
    
    
    54.9
    
    
    
    (2
    )%Subtotal
    
    
    76.2
    
    
    
    77.8
    
    
    
    (2
    )%Non-recurring
    
    
    1.4
    
    
    
    3.6
    
    
    
    (60
    )%Total business
    
    $
    77.6
    
    
    $
    81.4
    
    
    
    (5
    )%ResidentialMonthly charges
    
    $
    16.3
    
    
    $
    17.6
    
    
    
    (8
    )%Usage
    
    
    12.1
    
    
    
    13.6
    
    
    
    (11
    )%Subtotal
    
    
    28.4
    
    
    
    31.2
    
    
    
    (9
    )%Non-recurring
    
    
    3.0
    
    
    
    2.0
    
    
    
    47
    %Total residential
    
    $
    31.4
    
    
    $
    33.2
    
    
    
    (6
    )%CompanyMonthly charges
    
    $
    17.1
    
    
    $
    18.6
    
    
    
    (8
    )%Usage
    
    
    22.4
    
    
    
    21.6
    
    
    
    4
    %Subtotal
    
    
    39.5
    
    
    
    40.2
    
    
    
    (2
    )%Non-recurring
    
    
    2.7
    
    
    
    2.3
    
    
    
    14
    %Total company
    
    $
    42.2
    
    
    $
    42.5
    
    
    
    (1
    )%
 48




---



##### Table of Contents



At December 312005
    
    
    2004
    
    
    %Voice lines:Business lines
    
    
    36,680
    
    
    
    28,249
    
    
    
    30
    %Residential lines
    
    
    154,233
    
    
    
    125,934
    
    
    
    22
    %Public Telephony
    
    
    5,289
    
    
    
    492
    
    
    
    975
    %Wholesale lines
    
    
    10,090
    
    
    
    10,220
    
    
    
    (1
    )%Total lines
    
    
    206,292
    
    
    
    164,895
    
    
    
    25
    %
 Operating costs and expenses
  
    
    network operating costs which, include technical expenses (comprised of electric
power, site leases and maintenance of telecommunications equipment), installation
expenses, when applicable and disconnection expenses;
    
    selling, general and administrative expenses, which primarily included salaries,
wages and benefits; consulting fees, which primarily related to consulting services and
general legal and accounting fees; leasing costs which primarily related to our
headquarters, warehouses, and other facilities; marketing expenses which primarily
related to the implementation of our branding campaign, general advertising and
promotions; and provisioning for bad debt; and
    
    depreciation and amortization mainly related to pre-operating expenses, frequency
rights, telephone network systems and equipment and intangibles.
  
    
    a Ps.53.0 million, or 23.9%, increase in network operating services resulting mainly
from (i) a Ps.30.4 million increase in local-to-mobile interconnection costs associated
with a significant increase in local-to-mobile traffic, together with a Ps13.7 million
increase in long distance interconnection as a result of increased long distance
traffic, (ii) Ps.6.0 million costs associated with the operation of the CATV network,
(iii) Ps.4.0 million increase in costs related to the lease of ports and circuits
required for our backbone and last mile connectivity as a result of the growth of our
network, and, (iv) Ps.1.2 million lower other costs, primarily the reduction of
internet service costs as a result of lower rates obtained from new suppliers of
internet access;
    
    a Ps9.8 million, or 11.8% increase in technical expenses primarily due to (i) a
12.2% increase, or Ps$4.3 million in maintenance as a result of our larger telephone
network, (ii) a Ps$2.2 million, or 7.8% increase in leases of sites and expenses related to the operation of our
telephone network, and (iii) Ps.3.3 million in other expenses;
 49




---



##### Table of Contents




    
    a Ps.64.4 million, or 18.6%, decrease in depreciation and amortization mainly
related to the modification of the remaining useful lives and recalculation of the
depreciation for the year 2005; and
    
    a Ps.4.3 million, or 37.3%, increase in installation expenses basically as a result
of lines installed on the CATV network. As a result of competitive pressures we have
waived and will waive installation charges to our customers (we record installation
expense at the time of installation only when we bill our customers for installation
fees, and during 2004 and 2005 we waived installation fees in many instances due to
competitive pressures), otherwise we capitalize and amortize the installation costs.
   Integral cost of financing
  Year ended December 312005
    
    
    2004(in millions)Interest paid  Net
    
    Ps.
    (97.1
    )
    
    Ps.
    (38.7
    )Exchange gain (loss)  Net
    
    
    20.0
    
    
    
    (1.5
    )Gain on monetary position
    
    
    22.1
    
    
    
    89.0Integral cost of financing
    
    Ps.
    (55.0
    )
    
    Ps.
    48.8
     50




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##### Table of Contents



Tax provisions
    Year ended December 31, 2004 compared to year ended December 31, 2003
 Net revenues
    Year ended December 312004
    
    
    2003(in millions)Voice
    
    Ps.
    739.4
    
    
    Ps.
    691.2Data
    
    
    43.2
    
    
    
    48.7Wholesale
    
    
    114.6
    
    
    
    92.4Total revenues
    
    Ps.
    897.2
    
    
    Ps.
    832.3
  51




---



##### Table of Contents



ARPU2004
    
    
    2003
    
    
    %(in U.S. dollars)BusinessMonthly charges
    
    $
    22.9
    
    
    $
    26.6
    
    
    
    (14
    )%Usage
    
    
    54.9
    
    
    
    56.6
    
    
    
    (3
    )%Subtotal
    
    
    77.8
    
    
    
    83.3
    
    
    
    (7
    )%Non-recurring
    
    
    3.6
    
    
    
    3.3
    
    
    
    (9
    )%Total business
    
    $
    81.4
    
    
    $
    86.5
    
    
    
    (6
    )%ResidentialMonthly charges
    
    $
    17.6
    
    
    $
    18.4
    
    
    
    (4
    )%Usage
    
    
    13.6
    
    
    
    13.4
    
    
    
    2
    %Subtotal
    
    
    31.2
    
    
    
    31.7
    
    
    
    (2
    )%Non-recurring
    
    
    2.0
    
    
    
    1.3
    
    
    
    56
    %Total residential
    
    $
    33.2
    
    
    $
    33.0
    
    
    
    1
    %CompanyMonthly charges
    
    $
    18.6
    
    
    $
    19.9
    
    
    
    (7
    )%Usage
    
    
    21.6
    
    
    
    21.4
    
    
    
    1
    %Subtotal
    
    
    40.2
    
    
    
    41.3
    
    
    
    (3
    )%Non-recurring
    
    
    2.3
    
    
    
    1.7
    
    
    
    34
    %Total company
    
    $
    42.5
    
    
    $
    43.0
    
    
    
    (1
    )%
    At December 312004
    
    
    2003
    
    
    %Voice lines:Business lines
    
    
    28,249
    
    
    
    24,305
    
    
    
    16
    %Residential lines
    
    
    125,934
    
    
    
    106,389
    
    
    
    18
    %Public telephony
    
    
    492
    
    
    
    
    
    
    
    N/AWholesale lines
    
    
    10,220
    
    
    
    6,850
    
    
    
    49
    %Total lines
    
    
    164,895
    
    
    
    137,544
    
    
    
    20
    %
 Operating costs and expenses
  52




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
    
    a Ps.15.7 million, or 7.6% increase in network operating costs resulting mainly from
(i) a Ps.14.5 million increase in local-to-mobile interconnection costs associated with
significant increases in local-to-mobile traffic, partially offset by a Ps.4.5 million
decrease in long distance interconnection as a result of lower per-minute rates
obtained from several carriers and improved routing of our long distance traffic, (ii)
Ps.6.6 million increase in costs related to the lease of circuits required for our
backbone and last mile connectivity as a result of the growth of our network, and (iii)
Ps.0.8 million lower other costs, primarily the reduction of internet service costs as
a result of lower rates obtained from new suppliers of internet access;
    
    a Ps. 17.6 million or 26.7% increase in technical expenses primarily due to (i) a
46.9% increase, or Ps.11.3 million in maintenance as a result of our larger telephone
network, and (ii) a Ps. 6.3 million, or 15.1% increase in leases of sites and expenses
related to the operation of our network;
    
    a Ps.19.3 million, or 5.2% decrease in depreciation and amortization related to the
termination of the depreciation of some assets with short expected life period such as
electronic and computing equipment and software; and
    
    a Ps.15.7 million, or 57.4% reduction in installation expenses due to waivers of
installation charges granted as a result of competitive pressures (we record
installation expense at the time of installation only when we bill our customers for
installation fees, and during 2003 and 2004 we waived installation fees in many
instances due to competitive pressures). Through December 31, 2002, when we waived
installation costs to our customers, installation costs were capitalized and amortized
on a straight-line basis over a period of 20 years. Beginning in 2003, when we waive
installation costs, we capitalize and amortize such costs on a straight-line basis over
a period equal to the remaining original term of the microwave concessions, which
expires in October 2017.
   Integral cost of financing
  53




---



##### Table of Contents



Year ended December 312004
    
    
    2003(in millions)Interest paid  Net
    
    Ps.
    (38.7
    )
    
    Ps.
    (28.3
    )Exchange gain (loss)  Net
    
    
    (1.5
    )
    
    
    (188.2
    )Gain on monetary position
    
    
    89.0
    
    
    
    82.8Integral cost of financing
    
    Ps.
    48.8
    
    
    Ps.
    133.7
     Asset tax
  Critical accounting policies
 Applications of critical accounting policies and estimates.
   
    
    it requires us to make assumptions because information was not available at the time
or it included matters that were highly uncertain at the time we were making the
estimate, and
    
    changes in the estimate or different estimates that we could have selected would
have had a material impact on our financial condition or results of operations.
 54




---



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Allowance of doubtful accounts receivable
   Revenue recognition
        55




---



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Installation revenues and costs
   Valuation of long-lived assets
  56




---



##### Table of Contents



Deferred taxes
   Principal differences between Mexican GAAP and U.S. GAAP
  Recent United States accounting pronouncements
   57




---



##### Table of Contents



Recent Mexican accounting pronouncements
    
    
    NIFs and Interpretations of NIFs issued by the CINIF.
    
    Bulletins issued by the
Accounting Principles Board of
the Mexican Institute of Public
Accountants (IMCP) that have
not been modified, replaced or
repealed by the new NIFs.
    
    The supplementary IFRS that are applicable.
    58




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##### Table of Contents



B. Liquidity and capital resources
 Financing sources and liquidity
  
    
    U.S.$100.0 million vendor financing facility from Nissho Iwai American Corporation,
bearing an annual interest rate of three-month LIBOR plus 4.15% due August 12, 2005.
Funds from this facility were used to purchase Lucent Technologies equipment. We used
U.S.$72.3 million of proceeds from the sale of the 133/4 notes on
March 17, 2000 to repay all amounts outstanding in full and terminated this facility.
    
    U.S.$20.0 million vendor financing facility from Nissho Iwai American Corporation,
bearing an annual interest rate of three-month LIBOR plus 4.15% due August 12, 2005.
Funds from this facility were used to purchase NEC equipment. We used U.S.$13.9
million of proceeds from the sale of the 133/4% notes on March 17, 2000 to repay all
amounts outstanding in full and terminated this facility.
    
    U.S.$18.7 million vendor financing from Hewlett Packard de México, bearing an annual
interest rate of three-month LIBOR plus 4.15% due November 25, 2005. We used U.S.$16.3
million of proceeds from the sale of the 133/4% notes on March 17, 2000 to repay all
amounts outstanding in full and terminated this facility.
    
    U.S.$70.0 million raised from private equity investors since inception through May
1998.
 3 4 3 4 3 4 3 4 3 4
  3 4
  59




---



##### Table of Contents




    
    Holders tendered an aggregate of U.S.$259,410,000 in principal amount of 133/4% notes
in exchange for an aggregate of (i) U.S.$165,078,150 in principal amount of old notes,
and (ii) 26,459,820 series N-2 convertible preferred shares, with an initial
liquidation preference of U.S.$0.4927 per share and limited voting rights, represented
by ordinary participation certificates or CPOs, which represented in the aggregate
15.2% of our then total capital stock;
    
    Existing and new shareholders invested U.S.$66.2 million and received preferred shares (more fully described in Principal Shareholders), which represented in the
aggregate 77.0% of our then total capital stock; and
    
    Our capital structure was restructured as more fully described in Item 7. Major
Shareholders and Related Party Transactions-A. Major shareholders and share
ownership-The capital restructuring.
 3 4 3 4 3 4
  Tasa de Interés Interbancaria de Equilibrio
  
    
    Holders tendered an aggregate of U.S.$162,505,711 in principal amount of old notes
in exchange for an aggregate of (i) U.S.$36,117,789 in principal amount of new notes
due 2009, bearing an annual interest rate of 4.00% from October 8, 2004 through April
14, 2005, 5.75% from April 15, 2005 through October 14, 2005, 7.75% from October 15,
2005 through April 14, 2006, 8.25% from April 15, 2006 though October 14, 2006, 9.25%
from October 5, 2006 through October 14, 2007, 10.25% from October 15, 2007 through
October 14, 2008, and 11.25% from October 15, 2008 through October 14, 2009, and (ii)
101,110,338 shares of our Series N-1 Preferred Shares;
    
    Maxcom received consents to the amendment of certain restrictive covenants of the
indenture governing the old notes representing 92.0% of the total principal amount of
outstanding old notes (other than old notes held by Maxcom or any affiliate of Maxcom),
therefore fulfilling the condition for the adoption of the proposed amendments.
  60




---



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DEBT MATURITY DATES(Thousands of U.S. Dollars)March-07
    
    
    April-07
    
    
    October-09
    
    
    TotalBefore October 8, 2004:133/4% notes
    
    
    
    
    
    
    11,590
    
    
    
    
    
    
    
    11,590old notes
    
    
    167,624
    
    
    
    
    
    
    
    
    
    
    
    167,624Total
    
    
    167,624
    
    
    
    11,590
    
    
    
    
    
    
    
    179,214After October 8, 2004:13.3/4% notes
    
    
    
    
    
    
    11,590
    
    
    
    
    
    
    
    11,590old notes
    
    
    5,118
    
    
    
    
    
    
    
    
    
    
    
    5,118new notes
    
    
    
    
    
    
    
    
    
    
    36,118
    
    
    
    36,118Total
    
    
    5,118
    
    
    
    11,590
    
    
    
    36,118
    
    
    
    52,826
       61




---



##### Table of Contents



Indebtedness
   Year ended December 312005
    
    
    2004(in millions)SHORT TERM COMMERCIAL PAPER DENOMINATED IN PESOSShort term commercial paper
    
    Ps.
    150,000Accrued interest
    
    
    1,500Total short term commercial paper denominated in pesos
    
    Ps.
    151,500BANK LOANS DENOMINATED IN PESOSShort-term portion:IXE Banco, S. A.
    
    Ps.
    47,573Banco Mercantil del Norte, S. A.
    
    
    19,075Banco Santander Serfin, S. A.
    
    
    
    
    
    Ps.
    150,443Total short term
    
    Ps.
    66,648
    
    
    Ps.
    150,443Long-term portion:IXE Banco, S. A.
    
    Ps.
    25,026
    
    
    Ps.Banco Mercantil del Norte, S. A.
    
    
    54,046Banco Santander Serfin, S. A.
    
    
    
    
    
    
    28,711Total long term
    
    Ps.
    79,072
    
    
    Ps.
    28,711Total bank loans denominated in pesos
    
    Ps.
    145,720
    
    
    Ps.
    179,154
 62




---



##### Table of Contents



Year ended December 312005
    
    
    2004(in millions)LONG TERM PAYABLE BONDS DENOMINATED IN U.S. DOLLARS$5,118 old notes (issued in connection with the
2002 recapitalization) with maturity in 2007,
bearing interest at 0% until March of 2006, and
as of the last year, will bear interest at a
rate of 10%.
    
    Ps.
    54,818
    
    
    Ps.
    59,573$36,118 new notes (issued in connection with
2004 recapitalization) bearing a variable
interest rate of 4% to 11.25% until October of
2009.
    
    
    386,853
    
    
    
    420,420$11,590: 133/4 notes (issued on March the
17th of 2000) bearing interest at a
rate of 13.75%, with maturity date on April the
1st of 2007.
    
    
    124,139
    
    
    
    134,910Accrued interest
    
    
    12,103
    
    
    
    8,793Less: Discount (net of accumulated amortization)
    
    
    (1,005
    )
    
    
    (1,684
    )Total Long term payable bonds denominated in U.S. dollars
    
    Ps.
    576,908
    
    
    Ps.
    622,012
 3 4 3 4 3 4 3 4 3 4 3 4
  63




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DEBT MATURITY DATES(Thousands of U.S. Dollars)March-07
    
    
    April-07
    
    
    October-09
    
    
    TotalBefore the 2004 recapitalization:13.3/4% notes
    
    
    
    
    
    
    11,590
    
    
    
    
    
    
    
    11,590old notes
    
    
    167,624
    
    
    
    
    
    
    
    
    
    
    
    167,624Total
    
    
    167,624
    
    
    
    11,590
    
    
    
    
    
    
    
    179,214After the 2004 recapitalization:13.3/4% notes
    
    
    
    
    
    
    11,590
    
    
    
    
    
    
    
    11,590old notes
    
    
    5,118
    
    
    
    
    
    
    
    
    
    
    
    5,118new notes
    
    
    
    
    
    
    
    
    
    
    36,118
    
    
    
    36,118Total
    
    
    5,118
    
    
    
    11,590
    
    
    
    36,118
    
    
    
    52,826
 3 4
 3 4 3 4
 Resources from Operating, Financing and Investing activities
  64




---



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Resources used for operating activities
             Resources provided by financing activities
   65




---



##### Table of Contents



Resources used for investing activities
   Other contractual obligations
   66




---



##### Table of Contents



2010 &2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    thereafter(in thousands of Pesos)Facilities
    
    Ps.
    4,822
    
    
    Ps.
    4,695
    
    
    Ps.
    2,900
    
    
    Ps.
    1,407
    
    
    Ps.
    6,303Sites
    
    
    16,437
    
    
    
    12,600
    
    
    
    11,017
    
    
    
    7,433
    
    
    
    21,748Poles
    
    
    7,866
    
    
    
    7,866
    
    
    
    7,866
    
    
    
    7,866
    
    
    
    7,866Others
    
    
    2,197
    
    
    
    
    
    
    
    

    
    
    

    
    
    
    

    Total
    
    Ps.
    31,322
    
    
    Ps.
    25,161
    
    
    Ps.
    21,783
    
    
    Ps.
    16,706
    
    
    Ps.
    35,917
  2010 &2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    Thereafter(in thousands of U.S. dollars)Corporate headquarters
    
    $
    1,759
    
    
    $
    1,806
    
    
    $
    1,849
    
    
    $
    1,897
    
    
    $
    5,981Sites
    
    
    385
    
    
    
    385
    
    
    
    360
    
    
    
    112
    
    
    
    90Total
    
    $
    2,144
    
    
    $
    2,191
    
    
    $
    2,209
    
    
    $
    2,009
    
    
    $
    6,071
  2010 &2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    thereafter(in thousands of Pesos)Corporate equipment(1)
    
    Ps.
    244
    
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.
    Network(1)
    
    
    540
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    Ps.
    784
    
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.
 
  67




---



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2010 &2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    thereafter(in thousands of U.S. dollars)Telephone equipment(1)
    
    $
    1,800
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Fiber optic
    
    
    882
    
    
    
    882
    
    
    
    882
    
    
    
    882
    
    
    
    10,579
    (2)Software(1)
    
    
    1,253
    
    
    

    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    3,935
    
    
    $
    882
    
    
    $
    882
    
    
    $
    882
    
    
    $
    10,579





|    |  |                            
|--- |  | ---------------------------
|(1) |  | Renewal on an annual basis.
|   
|(2) |  | Included until 2022.       





2006
    
    Ps.
    4,0322007
    
    
    3,6452008 and thereafter:
    
    
    3,324Total (*)
    
    Ps.
    11,001





|    |  |                                             
|--- |  | --------------------------------------------
|(*) |  | Includes interest to be accrued in Ps.2,279.



2006
    
    $
    8792007
    
    
    3632008 and thereafter:
    
    
    134Total (*)
    
    $
    1,376





|    |  |                                       
|--- |  | --------------------------------------
|(*) |  | Includes interest to be accrued in $7.



March-07
    
    April-07
    

October-09 2010 & thereafter(Thousands of U.S. Dollars)Before October 8,
2004:13.3/4% notes
    
    
    
    
    
    
    11,590
    
    
    
    
    
    
    old notes
    
    
    167,624
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    167,624
    
    
    
    11,590
    
    
    
    
    
    
    After October 8, 2004:13.3/4% notes
    
    
    
    
    
    
    11,590
    
    
    
    
    
    
    old notes
    
    
    5,118
    
    
    
    
    
    
    
    
    
    
    
    5,118new notes
    
    
    
    
    
    
    
    
    
    
    36,118
    
    
    
    36,118Total
    
    
    5,118
    
    
    
    11,590
    
    
    
    36,118
    
    
    
    52,826 Capital expenditures
 3 4
  68




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Dividend policy
  
    
    a minimum consolidated leverage ratio of less than 3.75 to 1.00;
    
    a minimum fixed charge coverage ratio of 2.00 to 1.00;
    
    no default (as defined in the indenture) must have occurred and be continuing or
result from the payment of the cash dividend; and
    
    the cash dividend payments do not exceed an amount determined in the indenture based
on, among other things, cash flow generated from operations or equity offerings and
consolidated interest expense.
 C. Research and development, patents and licenses, etc.
  D. Trend information
  
    
    The growth in broadband access;
    
    The convergence of services and industries, as evidenced by the introduction of
voice, data and video bundles in the market:
    
    Multi-service IP services;
    
    Mobile services.
   E. Off  balance sheet arrangements
  F. Tabular disclosure of contractual obligations
  69




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2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010 & thereafter(in thousands of Pesos)Facilities
    
    Ps.
    4,822
    
    
    Ps.
    4,695
    
    
    Ps.
    2,900
    
    
    Ps.
    1,407
    
    
    Ps.
    6,303Sites
    
    
    16,437
    
    
    
    12,600
    
    
    
    11,017
    
    
    
    7,433
    
    
    
    21,748Poles
    
    
    7,866
    
    
    
    7,866
    
    
    
    7,866
    
    
    
    7,866
    
    
    
    7,866Others
    
    
    2,197Total
    
    Ps.
    31,322
    
    
    Ps.
    25,161
    
    
    Ps.
    21,783
    
    
    Ps.
    16,706
    
    
    Ps.
    35,917
  2010 &2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    Thereafter(in thousands of U.S. dollars)Corporate headquarters
    
    $
    1,759
    
    
    $
    1,806
    
    
    $
    1,849
    
    
    $
    1,897
    
    
    $
    5,981Sites
    
    
    385
    
    
    
    385
    
    
    
    360
    
    
    
    112
    
    
    
    90PolesOthersTotal
    
    $
    2,144
    
    
    $
    2,191
    
    
    $
    2,209
    
    
    $
    2,009
    
    
    $
    6,071
  20010 &2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    thereafter(in thousands of Pesos)Corporate equipment(1)
    
    Ps.
    244
    
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.Network(1)
    
    
    540Total
    
    Ps.
    784
    
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.
 
 (1)
    
    Renewal on an annual basis.  2010 &2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    Thereafter(in thousands of U.S. dollars)Telephone equipment(1)
    
    $
    1,800
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $Fiber optic
    
    
    882
    
    
    
    882
    
    
    
    882
    
    
    
    882
    
    
    
    10,579
    (2)Software(1)
    
    
    1,253Total
    
    $
    3,935
    
    
    $
    882
    
    
    $
    882
    
    
    $
    882
    
    
    $
    10,579
 
 (1)
    
    Renewal on an annual basis. 70




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2008 &2006
    
    2007
    
    ThereafterDenominated in Pesos
    
    
    4,032
    
    
    
    3,645
    
    
    
    3,324Denominated in dollars
    
    
    879
    
    
    
    363
    
    
    
    134
 
 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 A. Directors and Senior Management
 Directors
    Name
    
    Position
    
    AgeAdrian Aguirre Gomez
    
    Series A and A-1 Director and Chairman of the Board
    
    55Lauro Gonzalez Moreno
    
    Series A and A-1 Director
    
    44Maria Guadalupe Aguirre Gomez
    
    Series A and A-1 Director
    
    56Marco Provencio Muñoz
    
    Series A and A-1 Director
    
    47Rodrigo Guerra Botello
    
    Series A and A-1 Director
    
    63Roberto Chute
    
    Series B and B-1 Director
    
    32Jacques Gliksberg
    
    Series B and B-1 Director
    
    48Marco Viola
    
    Series B and B-1 Director
    
    40Sebastián Valdéz
    
    Series B and B-1 Director
    
    44
  71




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##### Table of Contents



Adrián Aguirre Gómez
 Lauro Gonzalez Moreno,
 María Guadalupe Aguirre Gómez
 Marco Provencio Muñoz
 Rodrigo Guerra Botello
 72




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##### Table of Contents



Jacques Gliksberg
 Roberto Chute
 Marco Viola
 Sebastián Valdez
 Executive officers
    73




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##### Table of Contents



Name
    
    Position
    
    AgeRené Sagastuy
    
    President and Chief Executive Officer
    
    45José Antonio Solbes
    
    Chief Financial Officer
    
    40Ricardo Arévalo Ruiz
    
    Chief Operating and Information Technology Officer
    
    41Alejandro Díaz y Díaz
    
    Vice president of Sales and Marketing
    
    36
  René Sagastuy
 José Antonio Solbes
 Ricardo Arévalo Ruiz
 Alejandro Díaz y Díaz,
 74




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##### Table of Contents



B. Compensation
 General
    Old executive stock option plan
   
 
  New executive stock option plan
    75




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##### Table of Contents



C. Board practices
    Ley General de Sociedades Mercantiles comisario
   D. Employees
 Sindicato Nacional de Trabajadores de
Telecomunicaciones, Telefonía, Comunicaciones, Cibernética, Productos Eléctricos, Electrónicos,
Similares y Conexos de la República Mexicana
  76




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##### Table of Contents



E. Share ownership
   
 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 A. Major shareholders and share ownership
  ShareholdersBanc AmericaAguirre Gómez
    
    Equity
    
    OtherShares
    
    Family(1)
    
    Partners(2)
    
    Investors
    
    SubtotalSeries A SharesNumber of shares
    
    
    4,508,644
    
    
    
    
    
    
    
    
    
    
    
    4,508,644Percentage owned
    
    
    100.00
    %
    
    
    
    
    
    
    
    
    
    
    100.00
    %Series A-1 SharesNumber of shares
    
    
    6,088,896
    
    
    
    
    
    
    
    
    
    
    
    6,088,896Percentage owned
    
    
    100.00
    %
    
    
    
    
    
    
    
    
    
    
    100.00
    %Series B-1 SharesNumber of shares
    
    
    
    
    
    
    10,089,375
    
    
    
    92,575
    
    
    
    10,181,950Percentage owned
    
    
    
    
    
    
    99.09
    %
    
    
    0.91
    %
    
    
    100.00
    %Series N SharesNumber of shares
    
    
    42,052
    
    
    
    3,505,738
    
    
    
    5,314,044
    (4)
    
    
    8,861,834Percentage owned
    
    
    0.47
    %
    
    
    39.56
    %
    
    
    59.97
    %
    
    
    100.00
    %Series N-1 SharesNumber of shares
    
    
    
    
    
    
    217,207,981
    
    
    
    3,506,893
    (4)
    
    
    220,714,874Percentage owned
    
    
    
    
    
    
    98.41
    %
    
    
    1.59
    %
    
    
    100.00
    %Series N-2 Shares(3)Number of shares
    
    
    
    
    
    
    
    
    
    
    26,867,820
    
    
    
    26,867,820Percentage owned
    
    
    
    
    
    
    
    
    
    
    100.00
    %
    
    
    100.00
    %TotalNumber of shares
    
    
    10,639,592
    
    
    
    230,803,094
    
    
    
    35,781,332
    
    
    
    277,224,018Percentage owned
    
    
    3.84
    %
    
    
    83.26
    %
    
    
    12.91
    %
    
    
    100.00
    %
 
 (1)
    
    The shares of Maxcom controlled by the Aguirre Gomez family are held individually or through
trusts or corporations (Adrian Aguirre Gomez 1,254,997 Series A, 1,522,224 Series A-1 and
42,052 Series N Shares; Maria Guadalupe Aguirre Gomez 1,084,549 Series A, 1,522,224 Series A-1
Shares, Maria Elena Aguirre Gomez 1,084,549 Series A, 1,522,224 Series A-1 Shares 1,084,548
Series A, 1,522,224 Series A-1 Shares and Maria Trinidad Aguirre Gómez 1,084,549 Series A,
1,522,224 Series A-1 Shares). As part of the 2004 restructuring, the Aguirre Gómez family
exchanged i) 1,226,373 of our series B common shares for 1,226,373 of our series A common
shares, and ii) 2,055,843 of our series N shares for 2,055,843 of our series A shares. 77




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##### Table of Contents



(2)
    
    The shares of Maxcom controlled by Banc America Equity Partners are held through (i)
Nexus-Maxcom Holdings I, LLC, which holds 166,408,377 shares or approximately 60.3% of the
total outstanding capital stock, (ii) BASCF-Maxcom Holding I, LLC which holds 60,888,979
shares or approximately 21.96% of the total outstanding capital stock, (iii) BAS Capital
Funding Corporation, which holds 3,155,164 shares or approximately 1.14%, and (iv) BankAmerica
Investment Corporation, which holds approximately 0.13% of the total outstanding capital
stock. As part of the 2004 restructuring the entities controlled by Banc America Equity
Partners exchanged 4,333,741 of our series N-1 shares for 4,333,741 of our series B-1 shares.(3)
    
    The series N-2 shares were originally issued to the bondholders who participated in our debt
restructuring. During 2003 Nexus  Maxcom Holdings I, LLC acquired an amount of approximately
75% of the old notes, as well as a similar percentage of series N-2 shares, which are now
beneficially owned by Nexus  Maxcom Holdings I, LLC. See Item 5Operating and Financial
Review and ProspectsDebt restructuring and recapitalization. Additionally, during 2003
Nexus  Maxcom Holdings I, LLC acquired Series B-1 and N-1 shares previously held by Morgan
Stanley Asset Management, Caxton International and Credit Suisse First Boston Corporation.(4)
    
    As part of the agreements made between some of our current officers which also held shares,
in February 2005 Rene Sagastuy Ferrándiz, our Chief Executive Officer, Ricardo Arévalo, our
Chief Operation and Information Technology Officer and, Rogelio Espinosa Cantellano, head of
the Strategic Negotiations Direction exchanged an aggregate amount of 1,469,836 of our series
N shares for 1,469,836 of our series N-1 shares.  The 2002 and 2004 capital restructurings
 Dirección General de Inversión Extranjera
  
    
    Series A-1 common voting shares with preferred liquidation rights;
    
    Series B-1 common voting shares with preferred liquidation rights;
    
    Series N-1 preferred shares with limited voting rights; and
    
    Series N-2 preferred shares with limited voting rights.
   78




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##### Table of Contents




    
    Holders tendered an aggregate of U.S.$162,505,711 in principal amount of old notes
in exchange for an aggregate of (i) U.S.$36,117,789 in principal amount of new notes,
bearing an annual interest rate of 4.00% from October 8, 2004 through April 14, 2005,
5.75% from April 15, 2005 through October 14, 2005, 7.75% from October 15, 2005 through
April 14, 2006, 8.25% from April 15, 2006 though October 14, 2006, 9.25% from October
5, 2006 through October 14, 2007, 10.25% from October 15, 2007 through October 14,
2008, and 11.25% from October 15, 2008 through October 14, 2009 (the new notes), and
(ii) 101,110,338 shares of our Series N-1 Preferred Shares;
    
    Maxcom received consents to the amendment of certain restrictive covenants of the
indenture governing the old notes representing 92.0% of the total principal amount of
outstanding old notes (other than old notes held by Maxcom or any affiliate of Maxcom),
therefore fulfilling the condition for the adoption of the proposed amendments.
 Outstanding options and warrants
  Type
    
    ExerciseNumber of
    
    of
    
    priceName of option holder
    
    options
    
    Share
    
    Per share
    
    Expiration Date(US$)Bachow & Associates, Inc. (strategic assistance services) (1)
    
    
    442,312
    
    
    N
    
    
    3.06
    
    
    
    (9
    )Amsterdam Pacific LLC
    
    
    24,426
    
    
    N
    
    
    8.70
    
    
    Not Applicable1998-2000 Executive Stock Option Plan
    
    
    575,000
    
    
    N
    
    
    8.70 to 12.50
    
    
    20142001-2003 Executive Stock Option Plan (8)
    
    
    17,998,500
    
    
    N-1
    
    
    0.50
    
    
    2015UBS Warburg LLC (2)
    
    
    89,244
    
    
    N
    
    
    0.01
    
    
    2007Donaldson, Lufkin & Jenrette Securities Corporation (2)
    
    
    22,312
    
    
    N
    
    
    0.01
    
    
    2007133/4% notes warrantholders (3)
    
    
    764,938
    
    
    N
    
    
    0.01
    
    
    2007Adrián Aguirre (4)
    
    
    3,626,959
    
    
    N-1
    
    
    0.49
    
    
    2012Signing bonus reserve for new officers
    
    
    246,215
    
    
    N-1
    
    
    0.01
    
    
    Not ApplicableBAS Capital Funding Corporation (management services) (5)
    
    
    249,781
    
    
    N-1
    
    
    0.01
    
    
    Not ApplicableBankAmerica Investment Corporation (management services) (6)
    
    
    27,754
    
    
    N-1
    
    
    0.01
    
    
    Not ApplicableBachow & Associates, Inc. (management services) (7)
    
    
    277,535
    
    
    N-1
    
    
    0.01
    
    
    Not ApplicableDirectors and committee members compensation
    
    
    584,199
    
    
    N-1
    
    
    0.01
    
    
    1 year after grantingTotal
    
    
    24,929,175
 79




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##### Table of Contents



(1)
    
    We issued options to purchase up to 100,000 series N shares at U.S.$8.70 per share in May
1998 as compensation for strategic assistance services. Pursuant to our 2002
recapitalization, we issued options to purchase up to an additional 342,312 series N shares at
an exercise price of U.S.$3.06 per share and reduced the exercise price of the original
options to U.S.$3.06 per share as partial anti-dilution protection.(2)
    
    These warrants were issued in March 2000 as partial compensation for underwriting services
related to the issuance of units comprised of our 133/4% notes and warrants.(3)
    
    These warrants were issued as part of the March 2000 offering of our units comprised of our
133/4% notes and warrants.(4)
    
    We issued options to purchase up to 375,000 series N shares at a strike price varying between
U.S.$8.70 and U.S.$12.50 per share pursuant to the old executive stock option plan described
in ManagementCompensationOld Executive Stock Option Plan. Pursuant to our 2002
recapitalization, we issued options to purchase up to 3,251,959 series N shares at an exercise
price of U.S.$0.49 and reduced the exercise price of the original options to U.S.$0.49 per
share as partial anti-dilution protection. Pursuant to a shareholders meeting held on
December 17, 2004 we authorized an amendment to the existing options and warrants issued in
connection with employee compensation plans or management services to change the underlying
value of the options from N to N-1 preferred shares.(5)
    
    We issued options to purchase up to 42,300 series N shares at U.S.$0.01 per share in May 2001
as compensation for management services provided during 2000. Pursuant to our 2002
recapitalization, we issued options to purchase up to an additional 207,481 series N shares at
an exercise price of U.S.$0.01 per share as partial anti-dilution protection. Pursuant to a
shareholders meeting held on December 17, 2004 we authorized an amendment to the existing
options and warrants issued in connection with employee compensation plans or management
services to change the underlying value of the options from N to N-1 preferred shares.(6)
    
    We issued options to purchase up to 4,700 series N shares at U.S.$0.01 per share in May 2001
as compensation for management services provided during 2000. Pursuant to our 2002
recapitalization, we issued options to purchase up to an additional 23,053 series N shares at
an exercise price of U.S.$0.01 per share as partial anti-dilution protection. Pursuant to a
shareholders meeting held on December 17, 2004 we authorized an amendment to the existing
options and warrants issued in connection with employee compensation plans or management
services to change the underlying value of the options from N to N-1 preferred shares.(7)
    
    We issued options to purchase up to 47,000 series N shares at U.S.$0.01 per share in May 2001
as compensation for management services provided during 2000. Pursuant to our 2002
recapitalization, we issued options to purchase up to an additional 230,535 series N shares at
an exercise price of U.S.$0.01 per share as partial anti-dilution protection. Pursuant to a
shareholders meeting held on December 17, 2004 we authorized an amendment to the existing
options and warrants issued in connection with employee compensation plans or management
services to change the underlying value of the options from N to N-1 preferred shares.(8)
    
    The board has authorized that up to three million options to purchase Series N-1 shares be
granted to key officers in connection with a change of control as part of the severance
package agreements.(9)
    
    Options expire 2 years after holders have disposed all of their ownership interest.
   80




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Securityholders agreement
      B. Related party transactions
 General policy
  Operation services
  81




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##### Table of Contents



Strategic assistance services
  
    
    develop and implement a budget model template for our annual operating and capital budgets;
    
    evaluate and assist in the choice and implementation of a financial accounting system;
    
    develop a template for the monthly board of directors operational reporting package;
    
    evaluate and assist in the choice and implementation of a customer billing system;
    
    design a sales and marketing plan; and
    
    provide training and guidance to our Chief Financial Officer.
  Advertising
  Management services
   Spin-off and sale of subsidiary
 82




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##### Table of Contents



C. Interest of experts and counsel
  
 ITEM 8. FINANCIAL INFORMATION
 A. Consolidated statements and other financial information
 Financial statements
  Legal proceedings
 Significant unpaid receivable
  Dividend policy
  
    
    minimum consolidated leverage ratio of less than 3.75 to 1.00;
    
    a minimum fixed charge coverage ratio of 2.00 to 1.00;
    
    no default (as defined in the indenture) must have occurred and be continuing or
result from the payment of the cash dividend; and
    
    the cash dividend payments do not exceed an amount determined in the indenture based
on, among other things, cash flow generated from operations or equity offerings and
consolidated interest expense.
 B. Significant changes
  
 ITEM 9. THE OFFER AND LISTING
 A. Offer and listing details
  83




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##### Table of Contents



B. Plan of distribution
  C. Markets
  D. Selling shareholders
  E. Dilution
  F. Expenses of the issue
  
 ITEM 10. ADDITIONAL INFORMATION
 A. Share capital
  B. Memorandum and articles of association
 General
 sociedad anónima de capital variable
    % of TotalNumber
    
    CapitalClass of Shares
    
    of Shares
    
    StructureSeries A
    
    
    4,508,644
    
    
    
    1.62
    %Series A-1 Preferred Shares
    
    
    6,088,896
    
    
    
    2.19
    %Series B-1 Preferred Shares
    
    
    10,181,950
    
    
    
    3.67
    %Series N
    
    
    8,861,834
    
    
    
    3.72
    %Series N-1 Preferred Shares
    
    
    220,714,874
    
    
    
    79.08
    %Series N-2 Preferred Shares
    
    
    26,867,820
    
    
    
    9.69
    %Total
    
    
    277,224,018
    
    
    
    100.0
    %
 84




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##### Table of Contents



Dirección General de Inversión Extranjera
     Voting rights
   
    
    any amendment to the by-laws that adversely and disproportionately affects the
economic characteristics (i.e., conversion right, liquidation right and dividend right)
of the series N-1 preferred shares as compared to the series N-2 preferred shares; and
    
    any amendment to the section of the by-laws relating to the voting rights of series
N-1 preferred shares.
  
    
    determining whether a sale of all or substantially all of the consolidated assets of
Maxcom or a merger, recapitalization, reorganization or consolidation of Maxcom,
immediately after which the shareholders of Maxcom beneficially own less than 50% of
the voting power or equity securities of the surviving entity will not be deemed a
liquidation event with respect to the series N-2 preferred shares;
 85




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##### Table of Contents




    
    any amendment to the by-laws that adversely and disproportionately affects the
economic characteristics (i.e., conversion right, liquidation right and dividend right)
of the series N-2 preferred shares as compared to the series N-1 preferred shares;
    
    any amendment to the by-laws that adversely affects the right of the holders of a
majority of the series N-2 preferred shares to designate an observer (or, in the
circumstance described below, a member) to the board of directors;
    
    any amendment to the by-laws that adversely affects the rights of the observer
designated by the series N-2 preferred shares to receive, subject to any restrictions
imposed by applicable law, copies of any written materials distributed to the holders
of series A and B shares and series A-1 and B-1 preferred shares simultaneously with
such holders;
    
    certain amendments to the by-laws that impose additional transfer restrictions or
conditions on the series N-2 preferred shares, except to the extent necessary to comply
with applicable law;
    
    any amendment to the by-laws that adversely affects the co-sale rights or
obligations of holders of series N-2 preferred shares;
    
    any amendment to the by-laws that adversely affects the forced sale rights or
obligations of holders of series N-2 preferred shares; and
    
    any amendment to the section of the by-laws of Maxcom relating to the voting rights
of series N-2 preferred shares.
      86




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##### Table of Contents




    
    such shareholders have not voted in favor of a resolution approved at the relevant
shareholders meeting pursuant to which it was resolved not to take any action against
the directors who are to be sued; and
    
    the claim in question covers the total amount of damages alleged to have been caused
to Maxcom as well as to the individual plaintiffs interests.
    Approval of key matters
   
    
    the incurrence or assumption by the company and/or any of its subsidiaries of any
indebtedness (including capitalized lease obligations) or other liabilities exceeding
U.S.$10,000,000;
    
    the issuance of any equity securities of the company or any of its subsidiaries;
    
    the sale, transfer, exchange or other disposal of all or a significant portion of
the assets or equity securities of the company or any of its subsidiaries;
 87




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##### Table of Contents




    
    any assignment by the company or any of its subsidiaries for the benefit of
creditors or the voluntary commencement of any bankruptcy or insolvency proceedings;
    
    the establishment by the company or any of its subsidiaries of any
non-wholly-owned-subsidiary or the making by the company or any of its subsidiaries of
any loans or advances to, guarantees for the benefit of, or investments in, any person
or entity other than a wholly-owned subsidiary;
    
    the declaration of dividends on, or the making of any other distributions in respect
of, any of its capital stock, other than dividends and distributions by a direct or
indirect wholly-owned subsidiary of the company to its parent;
    
    the acquisition of any equity securities of the company or any of its subsidiaries;
    
    the entering into any transaction with any restricted persons;
    
    the election, appointment or removal of the Chief Executive Officer, the General
Managers of any business units, the Chief Operating Officer, the Chief Financial
Officer, the Director of Marketing and the Chief Engineer (or any other individual with
a similar or more senior title or position), and the approval of salary, compensation
and benefit or other similar plans for such key executives;
    
    the approval of the companys and its subsidiaries annual business plan and annual
budget for each fiscal year;
    
    the entering by the company or any of its subsidiaries into any new line of business
(other than the main corporate purpose of the company);
    
    any agreement that would restrict the companys or any of its subsidiaries right or
ability to perform the provisions of its by-laws (Estatutos) or any agreements or
instruments to which it is a party;
    
    the manner in which the shares or other interests of any subsidiary or entity owned
by the company shall be voted at shareholders meetings called for key matters;
    
    any amendments to the concessions/licenses granted by the Mexican authorities,
by-laws and certain other specified agreements;
    
    the subdivision or combination, in any manner, of the outstanding shares of one
class or series of shares, unless the outstanding shares of the other class or series
of shares of the company shall also be proportionately subdivided or combined in a
similar manner;
    
    the grant to any person or entity of the right to request the company to register securities; and
    
    any commitment or agreement to do any of the foregoing.
 Board of Directors
   88




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##### Table of Contents




    
    the series N-2 preferred shares, or such other voting preferred stock represents at
least 3% of the issued and outstanding capital stock of Maxcom; or
    
    there are any shares of series N-2 preferred shares outstanding and at least
U.S.$17.5 million principal amount of the old notes outstanding.
  Dividends
    Liquidation rights
   
    
    U.S.$0.4927 per share, as adjusted for stock splits, stock dividends and similar
events, plus the accretion of such amount at a cumulative rate of 12% per year
compounded semi-annually; and
 89




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##### Table of Contents




    
    the amount that holders of series N-2 preferred shares would have received if they
had converted all of their series N-2 preferred shares into series N shares (or, to the
extent the series N shares has been converted, to the class of stock the series N shares is converted into) immediately prior to the liquidation event.
    Changes in share capital
    Preemptive rights
   
    
    in connection with mergers or spin-offs;
    
    on the conversion of convertible debentures; or
    
    issuances of shares pursuant to a public offering, if a general extraordinary
shareholders meeting called for such purpose so approves and other requirements
specified in Article 81 of the Mexican Securities Law are satisfied, including
obtaining the approval of the Mexican National Banking and Securities Commission.
   90




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##### Table of Contents



Optional conversion rights
  
    
    the consummation of a public offering; and
    
    the elimination of certain foreign ownership restrictions under Mexican law so as to
permit the unrestricted ownership and/or control of Maxcom by non-Mexicans.
   Mandatory conversion
    91




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##### Table of Contents



Anti-dilution protection and conversion price adjustments
   
    
    any rights, options and warrants granted or issued, or authorized to be granted or
issued, to certain employees, directors, consultants and vendors of Maxcom and its
subsidiaries, as of March 5, 2002, or under any management incentive plan approved by
the board of directors, including the affirmative vote of at least one of the directors
selected from Nexus appointees.
    
    any securities issued pursuant to the private equity investment and up to U.S.$3.8
million of securities issued within one year of the consummation of the private equity
investment at or above U.S.$0.4927 per share;
    
    any shares issued upon the exercise or conversion of any of the foregoing; and
    
    any of the capital stock issued in connection with a conversion of any of the series
A-1, B-1, N-1 or N-2 preferred shares.
   
    
    an amount equal to (A) the sum of (i) the product derived by multiplying the
conversion price in effect immediately prior to such issuance or sale by the number of
common shares deemed outstanding, as defined below, immediately prior to such issue
or sale, plus (ii) the aggregate consideration (expressed as a net price per share), if
any received by Maxcom upon such issue or sale, divided by (B) the number of common
shares deemed outstanding immediately after such issue or sale; and
    
    the conversion price determined by multiplying the conversion price in effect
immediately prior to such issuance or sale by a fraction, the numerator of which will
be the sum of (i) the number of the common shares deemed outstanding immediately prior
to such issue or sale multiplied by the then market value of the then fair market value
of the common stock of Maxcom then outstanding as of the date of such issuance or sale
plus (ii) the aggregate consideration, if any, received by Maxcom upon such issuance or
sale and the denominator of which shall be the product derived by multiplying the then
fair market value of the common stock of Maxcom by the number of common shares deemed
outstanding immediately after such issue or sale.
   92




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##### Table of Contents



Right of first refusal
  
    
    a sale or transfer of at least 50.1% of the total capital stock of Maxcom or the
sale of all or substantially all of the consolidated assets of Maxcom in one or more
related transactions to an independent third party or parties, or
    
    the elimination of certain foreign ownership restrictions under Mexican law so as to
permit the unrestricted ownership and/or control of Maxcom by non-Mexicans.
 Right of first offer
  
    
    a qualified public offering;
    
    the sale or transfer of any series A-1, B-1 or N-1 preferred shares involving at
least 50.1% of the total capital stock of Maxcom or a sale of all or substantially all
of the consolidated assets of Maxcom in one or more related transactions to an
independent third party or parties.
 Co-sale rights and forced sale obligations
 Co-sale rights
  93




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##### Table of Contents




    
    a qualified public offering; or
    
    the sale or transfer of any series A-1, B-1 or N-1 preferred shares involving a
transfer of at least 50.1% of the total capital stock of Maxcom or a sale of all or
substantially all of the consolidated assets of Maxcom to an independent third party or
parties in one or more related transactions.
  
    
    a qualified public offering; or
    
    the sale or transfer of any series A-1, B-1 or N-1 preferred shares involving a
transfer of at least 50.1% of the total capital stock of Maxcom or a sale of all or
substantially all of the consolidated assets of Maxcom to an independent third party or
parties in one or more related transactions.
 Forced sale obligations
    
    
    the consideration for such sale is paid in cash and/or freely tradable,
exchangelisted equity securities; and
    
    the value of such consideration on a per share basis is not less than the then
applicable liquidation preference for each share of series N-2 preferred shares.
  
    
    a qualified public offering; or
    
    the sale or transfer of any series A-1, B-1 or N-1 preferred shares involving a
transfer of at least 50.1% of the total capital stock of Maxcom or a sale of all or
substantially all of the consolidated assets of Maxcom to an independent third party or
parties in one or more related transactions.
 Other provisions
  94




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##### Table of Contents



Rights and obligations with respect to public offerings
 Registration rights
   Cooperation in connection with an underwritten offering
  Listing rights
  Lock-up restrictions
  95




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##### Table of Contents



Transfer of CPOs and transfer restrictions
        
    
    transfers related to series N shares and N-1 and N-2 shares and any successor stock;
and
    
    subscriptions made pursuant to the exercise of a shareholders preemptive rights, as
long as the percentage participation of the shareholders in our capital stock does not
vary.
 Other provisions
 Ownership restrictions
  96




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##### Table of Contents



Forfeiture of stock
  Dissolution
  
    
    the impossibility of continuing with our current line of business;
    
    the resolution of our shareholders at an extraordinary general shareholders meeting;
    
    the reduction of the number of our shareholders to fewer than two; and
    
    the loss of two thirds of our capital stock.
 Shareholder conflicts of interest
  Director conflicts of interest
  Description of the CPO trust
 General
  Certificados de Participación Ordinarios
  97




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##### Table of Contents



Purpose
  Waiver of statutory preemptive rights
  Voting and economic rights
    Administration of the CPO trust
  Common representative
  98




---



##### Table of Contents



Transfer
  Term and termination
  Fees
  C. Material contracts
 Concessions
  Interconnection agreements
  Lucent supply agreement
  Metro Net capacity sales agreement
  Bestel capacity acquisition agreement
 99




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##### Table of Contents



Axtel sale of capacity agreement
  CPO trust agreement
  Securityholders agreement
  Spin-off
and sale of subsidiary
   Indentures
 2000 Indenture
 3 4
 100




---



##### Table of Contents



3 4
 Old Indenture
  New Indenture
  Warrant agreement
 3 4 3 4
 Lease termination agreement
   101




---



##### Table of Contents



Credit facilities
 Banco Santander
 Tasa de Interés
Interbancaria de Equilibrio
 Tasa de Interés Interbancaria de Equilibrio
 IXE Banco
 Tasa de Interés Interbancaria de Equilibrio
 Tasa de Interés Interbancaria de Equilibrio
 Certificados Bursatiles
 Tasa de Interés Interbancaria de Equilibrio
 Banorte
 Tasa de Interés Interbancaria de Equilibrio
 Collection Trust
  102




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##### Table of Contents



Hedging agreement
   D. Exchange controls
     E. Taxation
 United States Federal Income Tax Considerations
 General
 3 4 3 4
 103




---



##### Table of Contents




    
    An individual citizen or resident of the United States;
    
    a corporation or other entity taxable as a corporation created in or organized under the laws of the United States or
of any political subdivision thereof;
    
    an estate, the income of which is subject to U.S. federal income tax without regard to its source; or
    
    a trust, if a court within the United States is able to exercise primary supervision over its administration and one or
more United States persons have the authority to control all of the substantial decisions of such trust, or if the
trust has a valid election in effect under applicable Treasury Regulations to be treated as a U.S. person.
   
    
    a foreign person or entity;
    
    a tax-exempt organization, a financial institution, an insurance company, a regulated investment company or a dealer or
broker in securities or currencies;
    
    a trader in securities or commodities that elects mark-to-market treatment;
    
    a person who holds the Notes, and with respect to a holder of new notes, the CPOs, as part of an integrated investment
such as a straddle, hedge, constructive sale, conversion transaction or other risk reduction transaction;
    
    a person whose functional currency is not the U.S. dollar;
    
    a partnership or other flow-through entity (including an S corporation or a limited liability company treated as a
partnership for U.S. federal income tax purposes);
    
    a person subject to the alternative minimum tax; or
    
    a person who owns or will own directly, indirectly or by attribution 10% or more (by voting power) of our voting stock
or 10% or more (by value) of our outstanding capital stock.
  104




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U.S. federal income tax consequences to U.S. Holders of the Notes
 Payments of interest and additional amounts.
 Original issue discount.
  The new notes .
   105




---



##### Table of Contents



The old notes .
    The 13 3/4% notes
  Inclusion of original issue discount in income.
 106




---



##### Table of Contents




    
    the product of the Notes adjusted issue price at the beginning of such accrual period and its yield to maturity
(determined on the basis of compounding at the close of each accrual period and properly adjusted for the length of the
accrual period) over
    
    the amount of qualified stated interest payments, if any, allocable to such accrual period.
       Premium and acquisition premium.
 The new notes
 107




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##### Table of Contents



The old notes
  The 13 3/4% notes
 General
 Market discount.
 General
  108




---



##### Table of Contents



The new notes
  The old notes
 3 4
 Sale, exchange or retirement of a Note. General
 109




---



##### Table of Contents



Adjusted tax basis of the new notes provided that provided that
  Adjusted tax basis of the old notes
  Adjusted tax basis of the old notes and the CPOs
   Adjusted tax basis of the 13 3/4% notes
 110




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##### Table of Contents



Foreign tax credit. Interest, original issue discount and additional amounts
 Effect of Mexican withholding taxes
   Certain U.S. federal income tax consequences of holding and disposing of the CPOs
 Distributions.
  111




---



##### Table of Contents



Sale, redemption or other taxable disposition of the CPOs.
   Passive foreign investment company considerations.
   112




---



##### Table of Contents



Controlled foreign corporation considerations.
  Certain U.S. federal income tax consequences to non-U.S. holders of the Notes and CPOs
   Information reporting and backup withholding
   113




---



##### Table of Contents



Mexican taxation
 Ley del Impuesto sobre la Renta
   United States/Mexico and other tax treaties
  Mexican tax consequences to Foreign Holders of the exchange of old notes for new notes
 General
 114




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##### Table of Contents



Other taxes
 Mexican tax consequences to Foreign Holders of the notes
 Taxation of interest and principal
 
    
    the notes are offered through banks or brokerage houses in a country with which
Mexico has a tax treaty in force;
    
    the notes are registered in the Special Section of the National Registry of
Securities (Registro Nacional de Valores); and
    
    certain periodic information requirements by the Mexican Ministry of Finance
(Secretaría de Hacienda y Crédito Público) are complied with.
    
    If these conditions are not met, the applicable withholding tax rate will be 10%.
 FOREIGN HOLDERS SHOULD CONSULT THEIR TAX ADVISORS REGARDING WHETHER THEY RESIDE IN A COUNTRY THAT
HAS ENTERED INTO SUCH A TREATY WITH MEXICO WHICH IS EFFECTIVE, AND IF SO, THE CONDITIONS AND
REQUIREMENTS FOR OBTAINING BENEFITS UNDER SUCH TREATY.
  
    
    a shareholder of the issuer who owns, directly or indirectly, individually or
jointly with related parties, more than 10% of the voting stock of the issuer, or
    
    a legal entity 20% or more of whose stock is owned, directly or indirectly,
individually or jointly with related parties, by the issuer,
  Secretaría de Hacienda y Crédito Público
 
    
    the notes are registered with the Special Section of the National Registry of
Securities and Intermediaries and copies of approval of such registration are provided
to the Ministry of Finance;
    
    we timely file with the Ministry of Finance certain information relating to the
issuance of the new notes;
    
    we timely file with the Ministry of Finance on a quarterly basis information on the
amount and dates of interest payments made during each quarter and information
representing that no party related to us, directly or indirectly, is the effective
beneficiary of more than five percent (5%) of the aggregate amount of each such
interest payment; and
    
    we maintain records that evidence compliance with the conditions set forth above.
 115




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
    
    the effective beneficiary of the interest;
    
    duly incorporated under the laws of its country of origin;
    
    exempt in its country of origin from income tax on interest income; and
    
    registered with the Ministry of Finance for that purpose.
  Taxation of additional amounts
  Taxation of accrued interest
 Gain on dispositions
 Mexican tax consequences to Foreign Holders of the CPOs
 Secretaría de Hacienda y Crédito
Público
 116




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Certain tax consequences to Mexican holders on the exchange or disposition of the CPOs.
  F. Dividends and paying agents
  G. Statement by experts
  H. Documents on display
  I. Subsidiary information
  
 PART II
 
 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest rate risk
 3 4
 Foreign exchange risk
  117




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ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
  
 PART III
 
 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
  
 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
AND USE OF PROCEEDS
  
    
    all of the covenants restricting the incurrence of indebtedness, the making of
investments, the granting of loans, the payment of dividends, the creation of liens,
the entering into transactions with affiliates, the undertaking of mergers,
consolidation of sales, the disposition of assets or subsidiary stock, a change in
control and any limitations on the transfer of funds from subsidiaries to Maxcom;
    
    the redemption option in the event of a change of control; and
    
    events of default related to the non-compliance with such covenants, cross-defaults,
adverse judgments in excess of U.S.$5.0 million and certain bankruptcy events.
  
 ITEM 15. CONTROLS AND PROCEDURES
   118




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ITEM 16.
 A. AUDIT COMMITTEE FINANCIAL EXPERT
  B. CODE OF ETHICS
   C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  Year ended December 312005
    
    
    2004(in millions)Audit Fees(1)
    
    Ps.
    2.7
    
    
    Ps.
    2.6Taxes Fees and Other Statutory Audit requirements fees(2)
    
    
    0.7
    
    
    
    0.7Total revenues
    
    Ps.
    3.4.
    
    
    Ps.
    3.3.
 119




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##### Table of Contents



(1)
    
    Audit Fees includes fees associated with the annual audit of our consolidated financial
statements. Audit fees also include fees associated with Securities and Exchange Commission
statutory quarterly and annual reporting audit requirements.(2)
    
    Taxes Fees and Other Statutory Audit requirements fees includes fees associated with Mexican
statutory audit requirements for tax and other purposes. Taxes Fees and Other Statutory Audit
requirements fees also includes fees incurred for assistance with tax planning and compliance
matters.
  D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.
 Not Applicable
 E. PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
   120




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PART IV
 
 ITEM 17. FINANCIAL STATEMENTS
  121




---



##### 



ITEM 18. FINANCIAL STATEMENTS.
 PageMaxcom Telecomunicaciones, S.A. de C.V. and SubsidiariesReport of Independent Registered Public Accounting Firm
    
    
    2Consolidated Balance Sheets as of December 31, 2005 and 2004
    
    
    F-3Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003
    
    
    F-4Consolidated Statements of Changes in Shareholders Equity for the years ended December 31, 2005 and 2004
    
    
    F-5Consolidated Statements of Changes in Financial Position for the years ended December 31, 2005, 2004 and 2003
    
    
    F-6Notes to the Consolidated Financial Statements for the years ended December 31, 2005, 2004 and 2003
    
    
    F-7




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
      F-1




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##### Table of Contents



F-2




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##### Table of Contents



MAXCOM TELECOMUNICACIONES, S.A. DE C.V. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 AS OF
DECEMBER 31, 2005 AND 2004
  Thousands
of Mexican Pesos (Ps.) in
purchasing power  as of December 31, 2005, and in
thousands of US Dollars ($)
 2004
    
    
    2005
    
    
    2005(Unaudited)(Note 3)ASSETSCurrent assets:Cash and Temporary Investments
    
    Ps.
    62,189
    
    
    Ps.
    223,423
    
    
    $
    20,859Restricted cash
    
    
    5,740
    
    
    
    
    
    
    
    67,929
    
    
    
    223,423
    
    
    
    20,859Accounts receivable:Clients, net of estimate for doubtful accounts
of Ps.86,237 and Ps.65,200 in 2005 and 2004, respectively
    
    
    120,718
    
    
    
    172,139
    
    
    
    16,071Value-added tax refundable
    
    
    2,684
    
    
    
    22,754
    
    
    
    2,124Other accounts receivable
    
    
    30,523
    
    
    
    21,515
    
    
    
    2,009153,925
    
    
    
    216,408
    
    
    
    20,204Inventory, net of reserves for slow moving supply
of Ps. 312 and Ps. 353 in 2005 and 2004, respectively
    
    
    11,688
    
    
    
    15,403
    
    
    
    1,438Prepaid expenses  Net
    
    
    65,996
    
    
    
    76,784
    
    
    
    7,169Total current assets
    
    
    299,538
    
    
    
    532,018
    
    
    
    49,670Restricted long term cash (Note 9)
    
    
    13,105
    
    
    
    7,672
    
    
    
    716Frequency rights  Net (Note 5)
    
    
    97,419
    
    
    
    86,102
    
    
    
    8,039Preoperating expenses  Net
    
    
    158,607
    
    
    
    122,305
    
    
    
    11,419Intangible assets  Net (Note 8)
    
    
    378,330
    
    
    
    303,527
    
    
    
    28,338Telephone network systems and equipment  Net (Note 7)
    
    
    1,783,834
    
    
    
    2,082,795
    
    
    
    194,456Other assets:Labor obligations upon retirement (Note 12)
    
    
    
    
    
    
    14,798
    
    
    
    1,382Guaranty deposits
    
    
    16,684
    
    
    
    4,597
    
    
    
    429Other assets
    
    
    4,928
    
    
    
    5,904
    
    
    
    551Total assets
    
    Ps.
    2,752,445
    
    
    Ps.
    3,159,718
    
    
    $
    295,000LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Short-term bank loans portion (Note 9)
    
    Ps.
    150,443
    
    
    Ps.
    66,648
    
    
    $
    6,222Suppliers and other accounts payable
    
    
    222,757
    
    
    
    251,463
    
    
    
    23,477Clients deposits
    
    
    2,677
    
    
    
    3,999
    
    
    
    373Commercial paper (Note 10)
    
    
    
    
    
    
    151,500
    
    
    
    14,144Other taxes payable
    
    
    28,839
    
    
    
    18,707
    
    
    
    1,747Total current liabilities
    
    
    404,716
    
    
    
    492,317
    
    
    
    45,963Long-term liabilities:Notes payable  Net (Note 11)
    
    
    622,012
    
    
    
    576,908
    
    
    
    53,862Bank loans (Note 9)
    
    
    28,711
    
    
    
    79,072
    
    
    
    7,382Notes payable
    
    
    31,652
    
    
    
    140,454
    
    
    
    13,113Other accounts payable
    
    
    28,194
    
    
    
    25,620
    
    
    
    2,392Deferred income tax (Note 15)
    
    
    
    
    
    
    25,971
    
    
    
    2,425Labor obligations upon retirement (Note 12)
    
    
    
    
    
    
    16,693
    
    
    
    1,559Derivative financial instruments (Notes 4r. and 19)
    
    
    
    
    
    
    18,837
    
    
    
    1,759Total long-term liabilities
    
    
    710,569
    
    
    
    883,555
    
    
    
    82,492Total liabilities
    
    
    1,115,285
    
    
    
    1,375,872
    
    
    
    128,455Shareholders equity (Notes 13 and 18):Capital stock
    
    
    2,500,957
    
    
    
    2,744,607
    
    
    
    256,244Additional paid-in capital
    
    
    895,494
    
    
    
    219,622
    
    
    
    20,505Net loss for the year
    
    
    (1,759,291
    )
    
    
    (1,180,383
    )
    
    
    (110,204
    )Total shareholders equity
    
    
    1,637,160
    
    
    
    1,783,846
    
    
    
    166,545Commitments and contingencies (Note 16)Total liabilities and shareholders equity
    
    Ps.
    2,752,445
    
    
    Ps.
    3,159,718
    
    
    $
    295,000
  F-3




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##### Table of Contents



MAXCOM TELECOMUNICACIONES, S.A. DE C.V. AND SUBSIDIARIES
 
 CONSOLIDATED INCOME STATEMENTS
 FOR THE YEARS ENDED
DECEMBER 31, 2005, 2004 AND 2003
 Thousands
of Mexican Pesos (Ps.) in purchasing power  as of December 31, 2005, and in thousands of US Dollars ($)
 2003
    
    
    2004
    
    
    2005
    
    
    2005(Unaudited)(Note 3)Net revenues (Note 17)
    
    Ps.
    832,212
    
    
    Ps.
    897,149
    
    
    Ps.
    1,150,472
    
    
    $
    107,410Operating costs and expensesNetwork operating costs
    
    
    298,986
    
    
    
    316,606
    
    
    
    383,765
    
    
    
    35,829Selling, general and administrative
expenses
    
    
    419,018
    
    
    
    386,871
    
    
    
    468,270
    
    
    
    43,719Depreciation and amortization
    
    
    365,411
    
    
    
    346,045
    
    
    
    281,636
    
    
    
    26,294Total operating costs and expenses
    
    
    (1,083,415
    )
    
    
    (1,049,522
    )
    
    
    (1,133,671
    )
    
    
    (105,842
    )Operating profit (loss)
    
    
    (251,203
    )
    
    
    (152,373
    )
    
    
    16,801
    
    
    
    1,568Integral cost (income) of financing:Interest expense  Net
    
    
    28,310
    
    
    
    38,733
    
    
    
    97,123
    
    
    
    9,068Exchange gain (loss)  Net
    
    
    188,186
    
    
    
    1,451
    
    
    
    (19,973
    )
    
    
    (1,867
    )Gain on monetary position
    
    
    (82,781
    )
    
    
    (89,041
    )
    
    
    (22,090
    )
    
    
    (2,062
    )133,715
    
    
    
    (48,857
    )
    
    
    55,060
    
    
    
    5,139Other income (expense)  Net
    
    
    (164
    )
    
    
    (818
    )
    
    
    8,991
    
    
    
    839Loss before special entry
    
    
    (385,082
    )
    
    
    (104,334
    )
    
    
    (29,268
    )
    
    
    (2,732
    )Special item (Note 2)
    
    
    
    
    
    
    
    
    
    
    (15,365
    
    
    
    (1,435
    )Loss before provisions for taxes
    
    
    (385,082
    )
    
    
    (104,334
    )
    
    
    (44,633
    )
    
    
    (4,167
    )Tax provisions for: (Note 15)Asset tax
    
    
    13,375
    
    
    
    27,835
    
    
    
    
    
    
    
    Deferred income tax
    
    
    563
    
    
    
    651
    
    
    
    25,971
    
    
    
    2,484Current income tax
    
    
    
    
    
    
    
    
    
    
    635
    
    
    
    Employees profit-sharing
    
    
    95
    
    
    
    483
    
    
    
    
    
    
    
    14,033
    
    
    
    28,969
    
    
    
    26,606
    
    
    
    2,484Net loss for the year
    
    (Ps.
    399,115
    )
    
    (Ps.
    133,303
    )
    
    (Ps.
    71,239
    )
    
    ($
    6,651
    )
  F-4




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##### Table of Contents



MAXCOM TELECOMUNICACIONES, S.A. DE C.V. AND SUBSIDIARIES
 
 STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY FOR THE YEARS
 ENDED
DECEMBER 31, 2005, 2004 AND 2003
 Thousands
of Mexican Pesos (Ps.) in purchasing power  as of December 31, 2005, and in thousands of US Dollars ($)
 Additional
    
    
    
    
    
    
    TotalCapital
    
    
    Paid-in
    
    
    Accumulated
    
    
    shareholdersstock
    
    
    Capital
    
    
    deficit
    
    
    equityBalances at December the 31, 2003
    
    Ps.
    1,905,012
    
    
    Ps.
    1,595
    
    
    (Ps.
    1,625,988
    )
    
    Ps.
    280,619Increase in capital stock arising from debt restructuring (Note 13)
    
    
    595,945
    
    
    
    893,899
    
    
    
    
    
    
    
    1,489,844Net integral loss for the year
    
    
    
    
    
    
    
    
    
    
    (133,303
    )
    
    
    (133,303
    )Balances at December 31, 2004
    
    
    2,500,957
    
    
    
    895,494
    
    
    
    (1,759,291
    )
    
    
    1,637,160Spin-off effect (Notes 2 and 13)
    
    
    (650,249
    )
    
    
    
    
    
    
    650,147
    
    
    
    (102
    )Capitalization of premium on shares subscription
    
    
    893,899
    
    
    
    (893,899
    )
    
    
    
    
    
    
    Capitalization of liabilities (Note 13)
    
    
    
    
    
    
    218,027
    
    
    
    
    
    
    
    218,027Net loss for the year
    
    
    
    
    
    
    
    
    
    
    (71,239
    )
    
    
    (71,239
    )Balances at December 31, 2005
    
    Ps.
    2,744,607
    
    
    Ps.
    219,622
    
    
    (Ps.
    1,180,383
    )
    
    Ps.
    1,783,846U.S. Dollars (Unaudited) (Note 3)
    
    $
    256,244
    
    
    $
    20,505
    
    
    ($
    110,204
    )
    
    $
    166,545
  F-5




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##### Table of Contents



MAXCOM TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES
 
 STATEMENTS OF CHANGES IN THE CONSOLIDATED FINANCIAL POSITION
 FOR THE YEARS ENDED ON
DECEMBER 31, 2005, 2004 AND 2003
 Thousands of Mexican Pesos (Ps.) of purchasing power  as of December the 31st of 2005, and in thousands of US Dollars ($)
 2003
    
    
    2004
    
    
    2005
    
    
    2005(Unaudited)(Note 3)Operating activities:Net loss
    
    (Ps.
    399,115
    )
    
    (Ps.
    133,303
    )
    
    (Ps.
    71,239
    )
    
    ($
    6,651
    )Charges to income not affecting resources:Depreciation and amortization
    
    
    365,411
    
    
    
    346,045
    
    
    
    281,636
    
    
    
    26,296Labor obligations upon retirement
    
    
    
    
    
    
    
    
    
    
    1,895
    
    
    
    177Deferred income tax
    
    
    
    
    
    
    
    
    
    
    25,971
    
    
    
    2,425(Increase) decrease in:Accounts receivable  Net
    
    
    (9,051
    )
    
    
    (16,498
    )
    
    
    (62,483
    )
    
    
    (5,834
    )Inventory  Net
    
    
    1,576
    
    
    
    8,368
    
    
    
    (3,715
    )
    
    
    (347
    )Prepaid expenses  Net
    
    
    (15,716
    )
    
    
    (10,030
    )
    
    
    (10,788
    )
    
    
    (1,007
    )Restricted cash, liabilities and others  Net
    
    
    5,683
    
    
    
    82,133
    
    
    
    137,297
    
    
    
    12,818Resources arising from (used in) the following operating activities
    
    
    (51,212
    )
    
    
    276,715
    
    
    
    298,574
    
    
    
    27,877Financing activities:Increase in capital stock
    
    
    
    
    
    
    595,945
    
    
    
    
    
    
    
    Contributions for future capital increases
    
    
    1,122
    
    
    
    893,898
    
    
    
    
    
    
    
    Spin-off effect
    
    
    
    
    
    
    
    
    
    
    (102
    )
    
    
    (10
    )Capitalization of liabilities
    
    
    
    
    
    
    
    
    
    
    218,027
    
    
    
    20,356Derivative financial instruments
    
    
    
    
    
    
    
    
    
    
    18,837
    
    
    
    1,759Benefits of loans and bond payable
    
    
    100,930
    
    
    
    (1,390,376
    )
    
    
    72,962
    
    
    
    6,812Resources derived from financing activities
    
    
    102,052
    
    
    
    99,467
    
    
    
    309,724
    
    
    
    28,917Investment activities:Investment in telephone network systems and equipment,
net of dispositions
    
    
    (118,784
    )
    
    
    (335,008
    )
    
    
    (440,526
    )
    
    
    (41,130
    )Intangible assets
    
    
    (17,184
    )
    
    
    (33,348
    )
    
    
    (17,649
    )
    
    
    (1,648
    )Other assets
    
    
    (299
    )
    
    
    8,997
    
    
    
    11,111
    
    
    
    1,037Resources used in investment activities
    
    
    (136,267
    )
    
    
    (359,359
    )
    
    
    (447,064
    )
    
    
    (41,741
    )Cash and cash equivalents:Increase (decrease) in cash and temporary
investments
    
    
    (85,427
    )
    
    
    16,823
    
    
    
    161,234
    
    
    
    15,053Cash and cash equivalents at beginning of year
    
    
    130,793
    
    
    
    45,366
    
    
    
    62,189
    
    
    
    5,806Cash and cash equivalents at end of year
    
    Ps.
    45,366
    
    
    Ps.
    62,189
    
    
    Ps.
    223,423
    
    
    $
    20,859
  F-6




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##### Table of Contents



MAXCOM TELECOMUNICACIONES, S.A. DE C.V. AND SUBSIDIARIES
 
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED  DECEMBER 31, 2005, 2004 AND 2003
 
 NOTE 1  INCORPORATION AND BUSINESS
 th
  Secretaría de
Comunicaciones y Transportes SCT
  F-7




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NOTE 2
 SPIN-OFF AND SALE OF SUBSIDIARY
   F-8




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##### Table of Contents



NOTE 3  BASIS OF PRESENTATION
 Consolidation
  Subsidiary company
    
    Interest %
    
    Line of BusinessCorporativo en Telecomunicaciones, S. A. de C. V.
    
    
    100
    %
    
    Technical personnel servicesMaxcom Servicios Administrativos, S. A. de C. V.
    
    
    100
    %
    
    Administrative personnel servicesMaxcom SF, S. A. de C. V.
    
    
    100
    %
    
    Rendering of financial servicesOutsourcing Operadora de Personal, S. A. de C. V.
    
    
    100
    %
    
    Operating personnel servicesMaxcom T. V., S. A. de C. V. (1)
    
    
    100
    %
    
    Cable television servicesMaxcom USA, Inc. (1)
    
    
    100
    %
    
    International telecommunication Services
 
 (1)
    
    Maxcom T.V. and Maxcom USA are still in the preoperating stage.All significant balances and transactions between consolidated companies are eliminated in the
consolidation process. F-9




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##### Table of Contents



Convenience translation
 (Diario Oficial de la Federación)
 NOTE 4  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  a.
    
    The accompanying consolidated financial statements are expressed in thousands of Mexican
pesos, denoted by the symbol Ps., and have been prepared in accordance with Accounting
Principles Generally Accepted in Mexico (Mexican GAAP) issued by the Accounting Standards
Board (ASB) of the Mexican Institute of Public Accountants (MIPA), and are expressed in
pesos of purchasing power for the last fiscal year reported.b.
    
    Recognition of the effects of inflation -The financial statements of the Company have been prepared in accordance with Statement B-10
Recognition of the Effects of Inflation on Financial Information, (Integrated Document), which
provides the basis for the recognition of the effects of inflation.
 i.
    
    The Company restates its income statement to reflect the purchasing power of the
Mexican peso as of the most recent reporting date (December 31, 2005), using a restatement
factor derived from the change in the National Consumer Price Index (NCPI) from the month
in which the transaction occurred to the most recent year-end. The financial statements
have been restated to Mexican pesos as of December the 31, 2005 purchasing power, using the
NCPI as of that date. The financial statements of the previous years have also been
restated in terms of the purchasing power of the Mexican peso as of the most recent
financial reporting date, thus making them comparable. The restatement is determined by
using a restatement factor derived from the change in the NCPI, which for 2005, 2004 and
2003 was 1.0333, 1.0519 and 1.0397 respectively. Therefore, these amounts differ from
those previously reported.
 F-10




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ii.
    
    Capital stock, premium on shares subscription and accumulated deficit represents the value of
these items stated in purchasing power at the end of the last fiscal year. These values are
determined by applying the restatement factors derived from the NCPI.iii.
    
    Comprehensive income (loss) is represented by the net income (loss), plus those entries
required by specific accounting standards to be reflected in shareholders equity but which
do not constitute capital contributions, reductions or distributions, and it is restated on
the basis of NCPI factors.iv.
    
    The gain on monetary position represents the effect of inflation, measured in terms of
the NCPI, on net monthly monetary assets and liabilities for the year, expressed in pesos
of purchasing power as of the most recent fiscal year.v.
    
    Integral cost of financing consists of interest income and expenses, net exchange gains
or losses, and the gain or loss on the net monetary position. The integral cost of
financing during the development stage period was capitalized to preoperating expenses.
Once the Company commenced operations, amortization of these costs began over a ten-year
term.
 c.
    
    Cash and temporary investments -Temporary investments include highly liquid investments, valued to market value. The company
considers highly liquid investments with maturities of three months or less from date of purchase
to be cash equivalents.d.
    
    Inventories -Inventory consists of materials used to install telephone lines. It is initially recorded at
average cost and subsequently restated based on factors derived from the NCPI. Amounts
determined do not exceed fair value.e.
    
    Telephone network systems and equipment -Telephone network systems and equipment are recorded at acquisition cost and restated by applying
factors derived from the change in the NCPI since their acquisition date.Telecommunication equipment held for sale is valued at the lower of acquisition cost or net
realization value, where the acquisition cost is determined based on the method last in first out
(LIFO).
 F-11




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The Company constructs certain of its own network systems and related facilities. Internal costs
directly related to the construction of such facilities are capitalized. Such internal costs
capitalized during the year were Ps.47,250, Ps.44,662 and Ps.37,990 (including Ps.377, Ps.288 and
Ps. 29 of integral cost of financing) in 2005, 2004 and 2003, respectively.The Company opted to capitalize the integral cost of financing attributable to assets under
construction. Capitalized integral financing includes interest expenses, gains from monetary
position, and foreign exchange losses, and are determined by reference to the Companys average
interest cost on borrowings.When the installation cost is not invoiced to the client, such cost is capitalized and amortized
during the estimated useful life of the line contracted by the client.Depreciation is calculated by the straight-line method over the restated cost, based on the
estimated useful lives of the assets. Depreciation is charged to results of operations.The Company requested a technical study from an expert appraiser on the remnant useful lives of
its fixed assets, taking into consideration their operating and use conditions as of December 31,
2005. As a result thereof, useful lives were increased, as indicated in Note 7, with the effects
described therein.Maintenance and repair costs are charged to results as incurred; replacement and improvement
costs are capitalized. The cost and related reserves of assets sold or retired are removed from
the accounts, and any resulting profit or loss is reflected in results of operations.f.
    
    Concessions -On February 3, 1997, the SCT awarded the Company a concession to install and operate a public
telecommunications network for a 30-year period. That concession was subsequently amended in
1999, 2001, and 2004, and currently permits the Company to render basic telephony services with
national coverage, long-distance services, data transfer services, and other value added
services, see Note 16d.In accordance with Statement C-8 Intangible Assets of GAAP, this concession was not accounted
for financial reporting purposes and it is only disclosed through one note to these financial
statements.
 F-12




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##### Table of Contents



g.
    
    Frequency rights -Frequency rights are recorded at acquisition cost and restated by applying factors derived from
the NCPI since the acquisition date. Amortization is calculated by the straight-line method over
the term of 20 years, which is the term of the frequency rights, see Note 5.h.
    
    Preoperating expenses -All expenses incurred during the development stage or in specific projects in progress are
capitalized. Such expenses are amortized on a straight-line basis for a term of ten years. The
amortization period begins when the corresponding project commences its operations.For the years ended on December 31,2005, 2004 and 2003, the Company recorded amortization
expenses in the amounts of Ps.36,302, Ps.36,616 and Ps.36,088, respectively. The accumulated
amortization was Ps.240,717 and Ps.204,415 as of December the 31, 2005 and 2004, respectively.i.
    
    Intangibles -Intangible assets are recognized in the balance sheet as long as they are identifiable, they
provide future economic benefits, and the Company has control over such benefits. Intangible
assets with a definite useful life are amortized systematically based on the best estimation of
its useful life, as determined in accordance with the expected future economic benefits.Purchased software and certain activities of developing internal-use software are
capitalized and amortized over its expected useful lives. Other activities, such as training,
maintenance and re-engineering are recognized in the results of the period, as incurred.Debt issuance costs are amortized on a straight-line basis over the term of the related debt.j.
    
    Long-lived assets -Long-lived assets, tangible and intangible, are subject to an annual study to determine its value
in use and to define whether impairment exists or not. At December 2005 and 2004, the Companys
management carried out studies to determine the value in use of its long-lived assets and
identified its national telephony concession as its predominant asset, even though it represents
a non-amortizable intangible asset with a definite life. To this effect, the Company deemed the
date when this concession expires, February 2027, as the terminating date for its financial
projections. As result of such evaluations, it was determined that no impairment exists as of
December 31, 2005 and 2004.
 F-13




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##### Table of Contents



k.
    
    Liabilities and provisions -The Companys liabilities and provisions recognized in the balance sheet represent current
obligations which probably will require the disbursement of economic resources. These provisions
have been recorded at the best reasonable estimate to pay the current obligation; however, actual
results could differ from recognized provisions.l.
    
    Transactions in foreign currencies -Transactions in foreign currencies are recorded at the rates of exchange prevailing on the date
of the transaction. Assets and liabilities nominated in such currencies are valuated at the
exchange rate in force at the close of the period. The exchange profit or loss is recognized as
part of the integral financing cost.m.
    
    Income tax (ISR) -The Company has incurred tax losses since inception and accordingly has not provided for income
taxes.Income tax is recorded by the comprehensive asset-and-liability method, which consists of
recognizing deferred tax on all temporary differences determined between the book and tax values
of assets and liabilities, see Note 15.n.
    
    Labor obligations upon retirement -Seniority premiums, to which employees are entitled upon termination of employment after 15 years
of service, are recorded as cost in the years in which the respective services are rendered,
based on actuarial studies carried out using the projected unit credit method, see Note 12a.As of January 1, 2005, the Company adopted the amendments to Statement D-3 Labor Obligations
which incorporates rules to valuate, present and record the recognition of compensation
obligations at the end of the labor relationship due to events other than restructuring. These
effects are recognized through actuarial studies carried out by independent experts using the
projected unit credit method. The net cost of the period for this item amounted to Ps.4,238,
recognized in the profit and loss for the year. As of December 31, 2005, the initial adoption of
such adaptations generated liabilities of Ps.15,474 and transition assets of Ps.14,798, which
will be amortized over a term of 22 and 24 years. These terms represent the terms of the
average remnant labor life of the workers for the recognition of prior services for compensations
at the end of the labor relationship, see Note 12b.The Company has no other benefits or pension plans for its employees after retirement, or at
the end of the labor relationship.
 F-14




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##### Table of Contents



o.
    
    Financial instruments -The Companys financial instruments consist principally of cash and temporary investments,
restricted cash, accounts receivable, accounts payable and notes payable. The profit and loss
related to components of financial instruments classified as liabilities are recorded in the
integral financing cost. The book values of these financial instruments, except for bonds, are
close to its fair value.p.
    
    Stock-option compensations -
   inter alia,
   F-15




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2003
    
    2004
    
    2005Expected yield
    
    
    
    
    
    
    
    
    
    
    Expected stock price volatility
    
    
    50.00
    %
    
    
    52.03
    %
    
    
    55.00
    %Risk-free interest rate
    
    
    2.74
    %
    
    
    2.76
    %
    
    
    4.35
    %Expected life of options
    
    
    10
    
    
    
    10
    
    
    
    10
 q.
    
    Derivative financial instruments -The Company applied the provisions of Statement C-10, Derivative Financial Instruments and
Coverage Hedging of GAAP, which, besides requiring detail recording, valuation and disclosure
of all derivative financial instruments, requires that the effectiveness of cash flow hedges be
measured. The effective portion of the gains or losses on hedging instruments must be recognized
within comprehensive income. The adoption of this statement gave rise to a charge in the profit
and loss of the Company as of December 31, 2005 of Ps.18,774 due to the recognition of the
initial effect of the ineffectiveness of cash flow hedges. This effect was determined by the
fair value of the hedge, see Note 19.r.
    
    Revenue recognition -The Company recognizes revenues from telephone services provided to its clients, the sale of
telephone equipment, services provided to other telephone-service companies (such as
interconnection services), and installation charges.Revenues from services provided to clients, including installation and maintenance, are
recognized in the month the service is rendered.Revenues from the sale of telephone equipment to clients are recognized at the time of the sale
and/or delivery and installation of such equipment.Revenue from interconnection services is recognized on an accrual basis. The Company entered
into local interconnection contracts with various telephone companies under the bill and keep
compensatory agreement. In accordance with these agreements, if the imbalance between local
calls originated from the other telephony company and completed by Maxcom, and the calls
originated from Maxcom and completed by the other telephony company over the course of one month
do not exceed a determined percentage, there will be no payment of an interconnection rate charge
to the user for the interconnection services. However, if the imbalance exceeds that percentage
in a determined month, the net user will be subject to a per minute charge. The percentage of
imbalance was 70% for the period to December 31, 2002; 30% for January 1, 2003 to October 31,
2004; 18% for December 1 to 31, 2004; and 15% as of January 30, 2005. In the event that the
Company fails to maintain a significant percentage of residential users, the compensatory
agreement will be terminated and asymmetric interconnection rates could be applied.
 F-16




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##### Table of Contents



The Company also has interconnection contracts for long-distance mobile services with other
telephony companies. However, they do not include the feature of the bill and keep
compensatory agreement.During 2004, the Company started a new business line, the lease of transmission capacity through
its fiber optic ring. Revenues from lease of capacity are recorded in deferred revenue when
billed and then recognized ratably into revenue over the term of the contract.During 2005, the Company entered into alliances with two companies that render cable television
and Internet services (CATV) in order to also render telephony services using CATV
infrastructure. The Company issues a monthly invoice to the final client and records the three
services (voice, data and video) as revenue. Likewise, the Company receives from CATV companies
an invoice for television and Internet services (for the pertinent month), which is recorded as a
decrease to revenue of the Company so that only revenue for voices services is recognized.Advance payments from clients are classified as current liabilities until reimbursed. When the
contract is rescinded, these deposits are applied to any outstanding balance with the respective
customer.The Company creates a reserve in the amount of 90% of accounts receivable balance due over 90 but
less than 119 days, and of 100% of accounts receivable due over 120 days, except when there is a
negotiated agreement with a client. In such cases, a reserve is created in the amount of 30%
once accounts receivable balance is 90 days past due.s.
    
    Information by segments -The Statement B-5 Financial Information by Segments of GAAP requires the Company to review its
internal organizational structure and internal reporting system for purposes of identifying
segments. For the years presented, the Company has operated only one segment of business. The
revenue by geographical location included in Note 17 complies with a specific disclosure required
by the SCT in the Companys concession title.t.
    
    New accounting standards -On June 1, 2004, the Mexican Board for Investigation and Development of Financial Information
Standards (CINIF) assumed the responsibility over the accounting standards in Mexico. As part
of this responsibility and after an examination process carried out during the years of 2004 and
2005, the CINIF issued different Financial Reporting Standards (FRS) that come into effect as
of January of 2006.
 F-17




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##### Table of Contents



The purpose of these standards is to achieve harmonization between local standards used by the
different sectors of the economy and to be consistent, to the greatest extent possible, with the
International Financial Reporting Standards (IFRS).The structure of the FRS, to be compulsorily observed as of January 1, 2006, is as follows:
   The FRS and its interpretations issued by the CINIF.
   Statements issued by the ASB of the MIPA not amended, superseded or repealed by the new FRS.
   The IFRS that apply in a supplementary manner.ASBs bulletins will continue to remain as recommendations, and will form part of the FRS as
long as they do not cease to operate; this is, until they are repealed or no longer apply as a
result of amendment by any FRS.The FRS issued, which adoption is not deemed to have a significant impact on the financial
information, are listed hereinbelow:FIN A-1 Structure of Financial Information Standards.
FRS A-2 Basic principles.
FRS A-3 Needs of users and purpose of financial statements.
FRS A-4 Qualitative characteristics of financial statements.
FRS A-5 Basic elements of financial statements.
FRS A-6 Recognition and valuation.
FRS A-7 Presentation and disclosure.
FRS A-8 Supplementation.
FRS B-1 Accounting changes and correction of errors.
  NOTE 5  FREQUENCY RIGHTS
  2004
    
    
    2005Frequency rights
    
    Ps.
    144,507
    
    
    Ps.
    144,507Less  Accumulated amortization
    
    
    (47,088
    )
    
    
    (58,405
    )Ps.
    97,419
    
    
    Ps.
    86,102
  F-18




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NOTE 6  RELATED PARTIES
  2003
    
    
    2004
    
    
    2005Commissions and administrative services paid to:Comercializadora Road el Camino, S. A, de C. V. (1)
    
    Ps.
    48
    
    
    Ps.
    39
    
    
    Ps.
    1,427Expenses associated to Bank of America, Co. (2)
    
    
    212
    
    
    
    414
    
    
    
    488Advertising services provided by
Difusión Panorámica, S. A. de C. V. (3)
    
    
    
    
    
    
    91
    
    
    
    34Offices and site lease (4)
    
    
    262
    
    
    
    273
    
    
    
    Commissions paid to Francisco Adrián Aguirre Palme (5)
    
    
    
    
    
    
    60
    
    
    
    Travel expenses in relation to Bachow
and Associates, Inc. (6)
    
    
    277
    
    
    
    32
    
    
    
    Advertising and other administrative services
rendered by Operadora Plusgamma, S. A. de C. V.(7)
    
    
    311
    
    
    
    
    
    
    
    Travel expenses in relation to CT GlobalTelecommunications, Inc. and other expenses (8)
    
    
    (66
    )
    
    
    
    
    
    
    
 
 (1)
    
    The activity of 2005 and 2004 correspond to sales commissions of telephone lines. The
transactions carried out during 2003 correspond to administrative services.(2)
    
    Correspond to expenses relating to the debt restructuring and travel expenses.(3)
    
    Advertising services paid to Difusión Panorámica, S.A. de C.V.(4)
    
    The Company leased a site located within the premises of a building that, until 2004, was
controlled by the family of one of the shareholders.(5)
    
    During 2004, the Company incurred expenses of sales commissions of telephone lines.(6)
    
    Travel expenses of certain shareholders.(7)
    
    Corresponds to an investment in an advertising agreement of $3,000, executed on April of 2003
with Operadora Plusgamma, S.A. de C.V., which shall render such advertising services through
Grupo Radio Centro.(8)
    
    Credit note on travel expenses relating to the attendance of meetings by the Board of
Directors. F-19




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##### Table of Contents



NOTE 7  TELEPHONE NETWORK SYSTEMS AND EQUIPMENT  NET
  Useful life (years)2004
    
    
    2005
    
    
    2004
    
    
    2005Telecommunication network and equipment
    
    Ps.
    1,301,945
    
    
    Ps.
    1,462,591
    
    
    
    10
    
    
    
    17Leasehold improvements
    
    
    315,458
    
    
    
    452,068
    
    
    
    20
    
    
    
    30Radio equipment
    
    
    282,270
    
    
    
    269,776
    
    
    
    10
    
    
    
    30Line installation cost
    
    
    239,576
    
    
    
    266,963
    
    
    
    20
    
    
    
    30Electronic equipment
    
    
    230,677
    
    
    
    223,304
    
    
    
    3.33
    
    
    
    25Capitalized expenses due to construction of
networks
    
    
    162,464
    
    
    
    209,714
    
    
    
    20
    
    
    
    30Computer equipment
    
    
    60,709
    
    
    
    78,903
    
    
    
    3.33
    
    
    
    5Transportation equipment
    
    
    26,589
    
    
    
    29,979
    
    
    
    4
    
    
    
    4Office furniture
    
    
    17,178
    
    
    
    17,968
    
    
    
    10
    
    
    
    10Other
    
    
    17,286
    
    
    
    17,487
    
    
    
    10
    
    
    
    10Engineering equipment
    
    
    11,379
    
    
    
    11,943
    
    
    
    10
    
    
    
    10Subtotal
    
    
    2,665,531
    
    
    
    3,040,696Depreciation and accumulated amortization
    
    
    (1,113,245
    )
    
    
    (1,243,049
    )Subtotal
    
    
    1,552,286
    
    
    
    1,797,647Construction in progress
    
    
    231,548
    
    
    
    285,148Ps.
    1,783,834
    
    
    Ps.
    2,082,795
   F-20




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##### Table of Contents



2004
    
    
    2005Computer equipment
    
    Ps.
    
    
    
    Ps.
    15,953Transportation equipment
    
    
    3,286
    
    
    
    10,949Telecommunication equipment
    
    
    
    
    
    
    8,950Total
    
    Ps.
    3,286
    
    
    Ps.
    35,852
 NOTE 8  INTANGIBLE ASSETS:
  Term
ofamortization (years)2004
    
    
    2005
    
    
    2004
    
    
    2005Infrastructure rights
    
    Ps.
    275,085
    
    
    Ps.
    279,204
    
    
    
    30 & 15
    
    
    
    35 & 17Debt issuance costs
    
    
    264,619
    
    
    
    265,433
    
    
    
    7
    
    
    
    7Software licenses
    
    
    137,812
    
    
    
    149,985
    
    
    
    3.3
    
    
    
    3.3677,516
    
    
    
    694,622Accumulated amortization
    
    
    (299,186
    )
    
    
    (391,095
    )Ps.
    378,330
    
    
    Ps.
    303,527
  F-21




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##### Table of Contents



NOTE 9  LONG-TERM BANK LOANS:
  2004
    
    
    2005Short-term portion:IXE Banco, S. A. (1)
    
    Ps.
    
    
    
    Ps.
    47,573Banco Mercantil del Norte, S. A. (2)
    
    
    
    
    
    
    19,075Banco Santander Serfin, S. A. (3), (4) and (5)
    
    
    150,443
    
    
    
    Ps.
    150,443
    
    
    Ps.
    66,648Long-term portion:IXE Banco, S. A. (1)
    
    Ps.
    
    
    
    Ps.
    25,026Banco Mercantil del Norte, S. A. (2)
    
    
    
    
    
    
    54,046Banco Santander Serfin, S. A. (3), (4) and (5)
    
    
    28,711
    
    
    
    Ps.
    28,711
    
    
    Ps.
    79,072
 
 (1)
    
    The Company has two unsecured credits with IXE Banco, S.A.. One was taken out in April of
2005 for a term of 24 months; the second was taken out in October of 2005 for a term of 19
months. For both credits the monthly interest rate is estimated based on the equilibrium
interbank interest rate (EIIR) plus 3.0 percentage points and will be paid-off by equal
monthly amortizations of principal and interest on unpaid balances.(2)
    
    Unsecured line of credit taken out with Banco Mercantil del Norte, S.A., in October of 2005.
This line of credit bears monthly interest at an EIIR rate plus 3.0 percentage points. The
line of credit was taken out for a term of 48 months.
  F-22




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##### Table of Contents



(3)
    
    Unsecured line of credit with Banco Santander Serfin, S.A., that generated monthly interest
at an EIIR rate plus 1.0 percentage point. The agreement was executed on August 17, 2004, and
was renewed several times, until the Company paid it off on October 26, 2005.(4)
    
    Unsecured credit with Banco Santander Serfin, S.A., taken out at a monthly interest rate of
EIIR plus 1.2 percentage points. The credit was taken out in October of 2004, for a term of
18 months, with equal monthly amortizations of principal and interest on unpaid balances. The
credit was paid off in advance in November of 2005.(5)
    
    Unsecured line of credit with Banco Santander Serfin, S.A., with monthly interest at a LIBOR
rate plus 1.9 percentage points. The agreement was executed on April 28, 2004, and was
renewed several times until the Company paid it off on October 26, 2005.
  NOTE 10  SHORT-TERM FINANCING WITH COMMERCIAL PAPER
  F-23




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##### Table of Contents



NOTE 11  LONG-TERM PAYABLE BONDS
  2004
    
    
    2005$5,118: Old Bonds (issued in the year 2002 due to
restructuring debt) with maturity in 2007, bearing interest
at 0% until March of 2006, and as of the last year, bearing
interest at a rate of 10%.
    
    Ps.
    59,573
    
    
    Ps.
    54,818$36,118: New Bonds (issued in the year 2004 due to
restructuring debt) bearing a variable interest rate of 4% to
11.25% until October of 2009.
    
    
    420,420
    
    
    
    386,853$11,590: B Series Bonds (issued on March the
17th of 2000) bearing interest at a rate of
13.75%, with maturity date on April the 1st of
2007.
    
    
    134,910
    
    
    
    124,139Accrued interest
    
    
    8,793
    
    
    
    12,103Less: Discount (net of accumulated amortization)
    
    
    (1,684
    )
    
    
    (1,005
    )Ps.
    622,012
    
    
    Ps.
    576,908
  i.
    
    $5,118 of the same Old Bonds with maturity date on March 1, 2007, which will not bear
interest until March 1, 2006, and in the last year, will bear interest at a rate of 10% per
annum.
 ii.
    
    $36,118 New Bonds, which will bear interest at a variable rate. Said rate will be of 4% as
of the date of issuance until April 14, 2005, 5.75% until October 14, 2005, 7.75% until April
14, 2006, 8.25% until October 14, 2006, 9.25% until October 14, 2007, 10.25% until October
14, 2008 and 11.25% until October 14, 2009.
 F-24




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##### Table of Contents



iii.
    
    Regarding the remaining $126,388, the holders of the bonds accepted to make an increase to
the variable portion of the capital stock of the Company. Holders received 101,110,338 shares
with no-par value shown, of which 96,776,597 were Series N1 shares and 4,333,741 Series
B1 shares, at a subscription price of $1.25 per share, of which $0.75 was recorded as premium
on subscription of stock and $0.50 as capital stock.
 pari passu
   NOTE 12  LABOR OBLIGATIONS UPON RETIREMENT
  F-25




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##### Table of Contents



a. Seniority premium:Obligations due to current benefits
    
    Ps.
    602Less: assets of the planCurrent net liabilities
    
    
    602Less: projected net liabilities
    
    
    (1,219
    )Additional liabilities
    
    Ps.
    Obligation for projected benefits
    
    Ps.
    709Plus (less): Entries pending of amortization in 22 and 24 years:Net transition assets
    
    
    510Projected net liabilities
    
    Ps.
    1,219Net cost for the period:Labor cost
    
    Ps.
    217Financial cost
    
    
    21Transition assets amortization
    
    
    (22
    )Total net cost for the period (*)
    
    Ps.
    216b. Termination of employment:Obligations due to current benefits
    
    Ps.
    15,474Less: assets of the planCurrent net liabilities
    
    
    15,474Less: projected net liabilities
    
    
    (676
    )Additional liabilities
    
    Ps.
    14,798
 F-26




---



##### Table of Contents



Obligation for projected benefits
    
    Ps.
    20,443Plus (less): Entries pending of amortization in 22 and 24 years:Net transition liabilities
    
    
    (19,767
    )Projected net liabilities
    
    Ps.
    676Net cost for the period:Labor cost
    
    Ps.
    2,516Financial cost
    
    
    758Transition assets amortization
    
    
    964Total net cost for the period (*)
    
    Ps.
    4,238
 
 (*)
    
    The net cost for the period amounted to Ps.4,454, determined in the same manner as
obligations due to projected benefits, on an actual estimated rate of return of 4% and an
average salary increase of 1.5%.  Obligations due to current benefits upon termination of employment
    
    Ps.
    15,474Projected net liabilities for seniority premium
    
    
    1,219Total accrued liabilities for labor obligations
    
    Ps.
    16,693
 NOTE 13  SHAREHOLDERS EQUITY
  (Dirección General de Inversión Extranjera)
 F-27




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##### Table of Contents



Series and class of shares
    
    2003
    
    2004
    
    2005Issued and outstanding:A Series
    
    Class I (fixed portion)
    
    
    765,714
    
    
    
    1,528,827
    
    
    
    1,528,827A Series
    
    Class II (variable portion)
    
    
    510,714
    
    
    
    2,979,817
    
    
    
    2,979,817A1 Series
    
    Class II (variable portion)
    
    
    6,088,896
    
    
    
    6,088,896
    
    
    
    6,088,896B Series
    
    Class I (fixed portion)
    
    
    763,113
    
    
    
    
    
    
    
    B Series
    
    Class II (variable portion)
    
    
    463,260
    
    
    
    
    
    
    
    B1 Series
    
    Class II (variable portion)
    
    
    5,848,209
    
    
    
    10,181,950
    
    
    
    10,181,950N Series
    
    Class II (variable portion)
    
    
    12,237,513
    
    
    
    10,331,670
    
    
    
    8,861,835N1 Series
    
    Class II (variable portion)
    
    
    122,468,441
    
    
    
    219,245,038
    
    
    
    220,714,874N2 Series
    
    Class II (variable portion)
    
    
    26,867,820
    
    
    
    26,867,820
    
    
    
    26,867,820Subtotal
    
    
    
    
    176,013,680
    
    
    
    277,224,018
    
    
    
    277,224,019Authorized shares not outstanding:(treasury shares)N Series
    
    
    
    
    26,603,926
    
    
    
    3,361,483
    
    
    
    3,024,011N1 Series
    
    
    
    
    
    
    
    
    22,679,507
    
    
    
    23,110,943Subtotal
    
    
    
    
    26,603,926
    
    
    
    26,040,990
    
    
    
    26,134,954Total authorized shares
    
    
    202,617,606
    
    
    
    303,265,008
    
    
    
    303,358,972
  2004
    
    
    2005Capital stock
    
    Ps.
    2,255,565
    
    
    Ps.
    2,524,094Restatement effect
    
    
    245,392
    
    
    
    220,513Total capital stock
    
    Ps.
    2,500,957
    
    
    Ps.
    2,744,607
  F-28




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##### Table of Contents



(Ley General de Sociedades Mercantiles)
       F-29




---



##### Table of Contents



inter alia:
   NOTE 14  POSITION IN FOREIGN CURRENCY
  2004
    
    
    2005U.S. dollars:Assets
    
    $
    7,357
    
    
    $
    15,351Liabilities
    
    
    (69,481
    )
    
    
    (79,938
    )Net liabilities in U.S. dollars
    
    ($
    62,124
    )
    
    ($
    64,587
    )Exchange
rate at end of the year (Ps.  per U.S.$1.00)
    
    Ps.
    11.26
    
    
    Ps.
    10.71
 F-30




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##### Table of Contents



NOTE 15  INCOME TAX, ASSET TAX AND TAX LOSS CARRYFORWARDS
    2004
    
    
    2005Income tax incurred
    
    Ps
    651
    
    
    Ps.
    635Deferred income tax
    
    
    
    
    
    
    25,971Total provision
    
    Ps.
    651
    
    
    Ps.
    26,606
  F-31




---



##### Table of Contents



2004
    
    
    2005CURRENT:Allowance for uncollectible accounts
    
    Ps.
    20,864
    
    
    Ps.
    24,146Inventory
    
    
    (3,741
    )
    
    
    Prepaid expenses
    
    
    (22,595
    )
    
    
    (29,905
    )Provisions
    
    
    72,362
    
    
    
    70,410Total current
    
    
    66,890
    
    
    
    64,651NON-CURRENT:Telephone network equipment and leasehold improvements,
frequency rights, intangible assets and preoperating
expenses  Net
    
    
    (305,768
    )
    
    
    (215,895
    )Asset tax paid in previous years
    
    
    33,247
    
    
    
    33,227Tax loss carry forwards
    
    
    1,077,244
    
    
    
    95,930Total non-current
    
    
    804,723
    
    
    
    (86,738
    )Net deferred tax (liabilities) assets before valuation
allowance
    
    
    871,613
    
    
    
    (22,087
    )Tax losses valuation allowance
    
    
    (871,613
    )
    
    
    (3,884
    )Deferred income tax liabilities
    
    Ps.
    
    
    
    (Ps.
    25,971
    )
   F-32




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##### Table of Contents



Year of
    
    
    
    
    
    Year ofloss
    
    Amount
    
    
    maturity1996
    
    Ps.
    504
    
    
    
    20061997
    
    
    1,800
    
    
    
    20071998
    
    
    11,569
    
    
    
    20081999
    
    
    29,380
    
    
    
    20092000
    
    
    39,446
    
    
    
    20102001
    
    
    54,712
    
    
    
    20112002
    
    
    58,486
    
    
    
    20122003
    
    
    18,461
    
    
    
    20132004
    
    
    1,019
    
    
    
    20142005
    
    
    127,230
    
    
    
    2015Ps.
    342,607
    2004
    
    
    2005Employees profit sharing incurred
    
    Ps.
    483
    
    
    Ps.
    Deferred employees profit sharing
    
    
    
    
    
    
    Total provision
    
    Ps.
    483
    
    
    Ps.
    
 NOTE 16  COMMITMENTS AND CONTINGENCIES
    F-33




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##### Table of Contents



2006
    
    Ps.
    35,5632007
    
    
    29,4012008
    
    
    25,7402009
    
    
    17,9412010 and thereafter:
    
    
    36,905Ps.
    145,550
  2
  2006
    
    $
    1,7592007
    
    
    1,8062008
    
    
    1,8492009
    
    
    1,8972010 and thereafter:
    
    
    5,981$
    13,292
    2006
    
    Ps.
    4,0322007
    
    
    3,6452008 and thereafter:
    
    
    3,324Total (*)
    
    Ps.
    11,001
 
 (*)
    
    Includes interest to be accrued in Ps.2,279. F-34




---



##### Table of Contents



2006
    
    $
    8792007
    
    
    3632008 and thereafter:
    
    
    134Total (*)
    
    $
    1,376
 
 (*)
    
    Includes interest to be accrued in $7.        NOTE 17  REVENUE BY GEOGRAPHICAL LOCATION
  F-35




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##### Table of Contents



Metropolitan
    
    
    Downtown-Services
    
    Area
    
    
    south
    
    
    TotalYear that ended on December the 31 of 2005:Local
    
    Ps.
    465,565
    
    
    Ps.
    303,498
    
    
    Ps.
    769,063Long distance
    
    
    190,704
    
    
    
    161,081
    
    
    
    351,785Rent of dedicated links
    
    
    332
    
    
    
    478
    
    
    
    810Sale of client equipment
    
    
    2,667
    
    
    
    2,973
    
    
    
    5,640Lease of capacity
    
    
    22,347
    
    
    
    
    
    
    
    22,347Other
    
    
    827
    
    
    
    
    
    
    
    827Ps.
    682,442
    
    
    Ps.
    468,030
    
    
    Ps.
    1,150,472
 Metropolitan
    
    
    Downtown-Services
    
    Area
    
    
    south
    
    
    TotalYear that ended on December the 31 of 2004:Local
    
    Ps.
    462,760
    
    
    Ps.
    268,076
    
    
    Ps.
    730,836Long distance
    
    
    91,128
    
    
    
    48,585
    
    
    
    139,713Rent of dedicated links
    
    
    463
    
    
    
    942
    
    
    
    1,405Sale of client equipment
    
    
    3,663
    
    
    
    2,019
    
    
    
    5,682Lease of capacity
    
    
    18,297
    
    
    
    
    
    
    
    18,297Other
    
    
    1,216
    
    
    
    
    
    
    
    1,216Ps.
    577,527
    
    
    Ps.
    319,622
    
    
    Ps.
    897,149
 Metropolitan
    
    
    Downtown-Services
    
    Area
    
    
    south
    
    
    TotalYear that ended on December the 31 of 2003:Local
    
    Ps.
    421,077
    
    
    Ps.
    253,438
    
    
    Ps.
    674,515Long distance
    
    
    73,989
    
    
    
    46,720
    
    
    
    120,709Rent of dedicated links
    
    
    3,238
    
    
    
    566
    
    
    
    3,804Sale of client equipment
    
    
    15,679
    
    
    
    2,066
    
    
    
    17,745Lease of capacity
    
    
    15,246
    
    
    
    
    
    
    
    15,246Other
    
    
    193
    
    
    
    
    
    
    
    193Ps.
    529,422
    
    
    Ps.
    302,790
    
    
    Ps.
    832,212
 F-36




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##### Table of Contents



NOTE 18  STOCK OPTION PLANS
 a.
    
    Stock option plan for the purchase of shares by officers.i. Plan for executive officers -In May of 1998, the Company implemented an executive stock option plan. This plan provided that
the Company grant options, on every April 1, commencing in 1999 through April 2001, to its
executive officers. Under this plan, a technical committee determined the executive officers to
who options to purchase Series N shares were granted, as well as the terms of those options.Once awarded the options, the holders can immediately exercise 20% of such granted shares. In
order to keep these officers, the right to exercise the amount of the remaining options is
accrued on a yearly basis in a fifth part each remaining year. In case the officer ceases to
work for the Company, all options not exercised are forfeited. Options expire ten years from the
date of grant.As of December 31, 2005, under the aforesaid plan, there
were 575,000 shares available for granting to officers performance for the years of 1998, 1999 and 2000.As of December 31, 2005, 526,214 options of this plan had been granted, of which 304,502 remains
to be exercised, and 256,094 are fully exercisable.Options are subject to a trust in a trust managed by Banco Nacional de México, S.A., established
on June 20, 1999.ii. New executive stock option plan -The Company implemented a new executive stock plan, for the services rendered during the years
2002, 2003, and 2004. The plan is divided into four levels, depending on the ranking of the
different members of management. The first level includes the highest management level of the
Company and depends upon targets that the selfsame board fixes for the Company every year. The
participants of the three following levels are guaranteed a minimum amount of options. The
granting of options for the members of the last level, which is comprised of the junior
management, is discretionary.The underlying value of the options of this new executive option plan is comprised by Series N1
Class II shares, representing the variable portion of the capital stock of the Company.
 F-37




---



##### Table of Contents



Since this is a retention plan, once options are granted, their holders can immediately exercise
20% of such shares granted. In order to keep these officers in office, the right to exercise the
amount of the remaining options is accrued on a yearly basis in a fifth part each remaining year.
In case the officer ceases to work for the Company, all options not exercised are forfeited.
Options expire ten years from the date of grant.As of December 31, 2005, the board of directors and shareholders of the Company authorized an
aggregate of 17,998,500 shares to remunerate officers for the services they rendered during the
years 2002, 2003 and 2004. Also, part of these options served as extraordinary remunerations
granted to certain key officers in case of a change in the control of the Company.As of December 31, 2005, 13,529,500 shares had been granted, of which 2,705,900 were fully
exercisable.iii. Members of the Board of Directors and members of various committees -Members of the Board and of the various committees of the Company are entitled to receive their
emoluments by way of options to subscribe N1 Series Class II shares, representing the capital
stock of the Company.For each meeting of the Board or of the different committees of the Company where directors and
members of the different committees attend, they receive an option to purchase 2,500 shares at an
exercise price of $0.01 per share. The chairman of the Board or of the different committees is
entitled to receive options to subscribe 5,000 shares at the same abovementioned exercise price.
Options granted in each meeting may be exercised immediately and expire three years after,
beginning on the date when granted, except when the selfsame Board or the shareholders meeting
provides otherwise.As of December 31, 2005, 955,000 options had been granted in this plan, of which 637,500 are
fully exercisable.iv. Signing bonuses and other bonuses for officers or directors -From time to time the Company has granted signing bonuses, special bonuses and other bonuses by
way of stock options.As of December the 31 of 2005 there are 3,626,959 options for the purchase Series
N1, Class II shares, granted to one of the shareholders of the Company as remuneration for
special services rendered. The price to exercise these shares is of $0.50 per share. The Board
has determined that all of these options are available to be exercised.
 F-38




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##### Table of Contents



There is a reserve of 246,215 N1 Series, Class II treasury shares, available so that the
management or the Board of Directors may grant options on these shares as part of the signing
bonuses negotiated and signed to contract new key officers with the Company.The compensation expense of the abovementioned plans is determined based on the fair market
value per share using the Black-Scholes method. The above produced no charge to results during
the years ended on December 31, 2005 and 2004. A charge of Ps.8 was recognized as expense in
2003.Below is the summary of changes in employees capital options for the year ended on December 31,
2005 (in thousands of shares):
 2003
    
    
    2004
    
    
    2005Weighed-
    
    
    
    
    
    
    Weighed-
    
    
    
    
    
    
    Weighed-average
    
    
    
    
    
    
    average
    
    
    
    
    
    
    averageexercise
    
    
    
    
    
    
    exercise
    
    
    
    
    
    
    exerciseShares
    
    
    price
    
    
    Shares
    
    
    price
    
    
    Shares
    
    
    priceOutstanding at beginning of year
    
    
    15,935
    
    
    $
    0.56
    
    
    
    4,377
    
    
    $
    1.16
    
    
    
    4,464
    
    
    $
    1.14Granted
    
    
    318
    
    
    
    0.27
    
    
    
    188
    
    
    
    0.01
    
    
    
    13,712
    
    
    
    0.49Exercised
    
    
    173
    
    
    
    0.01
    
    
    
    100
    
    
    
    0.01
    
    
    
    0
    
    
    
    0.00Cancelled
    
    
    11,703
    
    
    
    0.33
    
    
    
    0
    
    
    
    0.00
    
    
    
    78
    
    
    
    0.01Outstanding at the end of the year
    
    
    4,377
    
    
    
    1.16
    
    
    
    4,465
    
    
    
    1.14
    
    
    
    18,098
    
    
    
    0.65Options exercisable at the end
of the year
    
    
    2,587
    
    
    
    1.41
    
    
    
    2,675
    
    
    
    1.36
    
    
    
    7,226
    
    
    
    0.71Weighted-average of options
granted during the year
(nominated in U.S.
dollars)
    
    
    
    
    
    $
    0.26
    
    
    
    
    
    
    $
    0.00
    
    
    
    
    
    
    $
    0.00
  F-39




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##### Table of Contents



Weighed-averageRange
    
    
    
    
    
    
    Remaining
    
    
    Exercise
    
    
    
    
    
    
    exerciseof prices
    
    
    Number
    
    
    life
    
    
    price
    
    
    Number
    
    
    priceAs of
December 31, 2005
    
    $
    0.01
    
    
    
    638
    
    
    
    0.41
    
    
    $
    0.01
    
    
    
    638
    
    
    $
    0.010.49
    
    
    
    3,627
    
    
    
    6.32
    
    
    
    0.49
    
    
    
    3,627
    
    
    
    0.490.50
    
    
    
    13,530
    
    
    
    9.58
    
    
    
    0.50
    
    
    
    2,706
    
    
    
    0.508.70
    
    
    
    33
    
    
    
    3.24
    
    
    
    8.70
    
    
    
    33
    
    
    
    8.7010.45
    
    
    
    191
    
    
    
    4.24
    
    
    
    10.45
    
    
    
    179
    
    
    
    10.4512.55
    
    
    
    80
    
    
    
    5.24
    
    
    
    12.55
    
    
    
    45
    
    
    
    12.55As of
December 31, 2004
    
    $
    0.01
    
    
    
    533
    
    
    
    0.41
    
    
    $
    0.01
    
    
    
    533
    
    
    $
    0.010.49
    
    
    
    3,627
    
    
    
    7.32
    
    
    
    0.49
    
    
    
    1,886
    
    
    
    0.498.70
    
    
    
    33
    
    
    
    4.24
    
    
    
    8.70
    
    
    
    33
    
    
    
    8.7010.45
    
    
    
    191
    
    
    
    5.24
    
    
    
    10.45
    
    
    
    179
    
    
    
    10.4512.55
    
    
    
    80
    
    
    
    6.24
    
    
    
    12.55
    
    
    
    45
    
    
    
    12.55As of
December 31, 2003
    
    $
    0.01
    
    
    
    445
    
    
    
    1.59
    
    
    $
    0.01
    
    
    
    445
    
    
    $
    0.010.49
    
    
    
    3,627
    
    
    
    8.33
    
    
    
    0.49
    
    
    
    1,886
    
    
    
    0.498.70
    
    
    
    33
    
    
    
    5.24
    
    
    
    8.70
    
    
    
    33
    
    
    
    8.7010.45
    
    
    
    191
    
    
    
    6.25
    
    
    
    10.45
    
    
    
    179
    
    
    
    10.4512.55
    
    
    
    80
    
    
    
    7.25
    
    
    
    12.55
    
    
    
    45
    
    
    
    12.55
 b.
    
    Options (warrants) for services rendered to the Company.
  3/4
    F-40




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##### Table of Contents



2003
    
    
    2004
    
    
    2005Weighed-
    
    
    
    
    
    
    Weighed-
    
    
    
    
    
    
    Weighed-average
    
    
    
    
    
    
    average
    
    
    
    
    
    
    averageexercise
    
    
    
    
    
    
    exercise
    
    
    
    
    
    
    exerciseShares
    
    
    price
    
    
    Shares
    
    
    price
    
    
    Shares
    
    
    priceOutstanding at beginning of year
    
    
    3,341
    
    
    $
    2.37
    
    
    
    3,341
    
    
    $
    2.37
    
    
    
    3,341
    
    
    $
    2.37Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cancelled
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,106
    
    
    
    3.06Outstanding at the end of the year
    
    
    3,341
    
    
    
    2.37
    
    
    
    3,341
    
    
    
    2.37
    
    
    
    2,235
    
    
    
    2.02Options exercisable at the end
of the year
    
    
    3,341
    
    
    $
    2.37
    
    
    
    3,341
    
    
    $
    2.37
    
    
    
    2,235
    
    
    $
    2.02Weighed average of
options granted during
the year (nominated in U.S.
dollars)
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
  ExercisableOutstanding:
    
    Weighted-Weighted-average
    
    
    
    
    
    
    averageRange
    
    
    
    
    
    
    Remaining
    
    
    Exercise
    
    
    
    
    
    
    exerciseof prices
    
    
    Number
    
    
    life
    
    
    price
    
    
    Number
    
    
    priceAs of
December 31, 2005
    
    $
    0.01
    
    
    
    1,432
    
    
    
    0.86
    
    
    $
    0.01
    
    
    
    1,432
    
    
    $
    0.013.06
    
    
    
    442
    
    
    
    2.00
    
    
    
    3.06
    
    
    
    442
    
    
    
    3.068.70
    
    
    
    362
    
    
    
    0.00
    
    
    
    8.70
    
    
    
    362
    
    
    
    8.70As of December 31, 2004
    
    $
    0.01
    
    
    
    1,432
    
    
    
    1.96
    
    
    $
    0.01
    
    
    
    1,432
    
    
    $
    0.013.06
    
    
    
    1,548
    
    
    
    
    
    
    
    3.06
    
    
    
    1,548
    
    
    
    3.068.70
    
    
    
    362
    
    
    
    0.05
    
    
    
    8.70
    
    
    
    362
    
    
    
    8.70As of December 31, 2003
    
    $
    0.01
    
    
    
    1,432
    
    
    
    2.93
    
    
    $
    0.01
    
    
    
    1,432
    
    
    $
    0.013.06
    
    
    
    1,548
    
    
    
    1.00
    
    
    
    3.06
    
    
    
    1,548
    
    
    
    3.068.70
    
    
    
    362
    
    
    
    1.05
    
    
    
    8.70
    
    
    
    362
    
    
    
    8.70
 F-41




---



##### Table of Contents



NOTE 19  HEDGES OF CASH FLOWS
    NOTE 20  SUBSEQUENT EVENTS
    F-42




---



##### Table of Contents



NOTE 21  SIGNIFICANT DIFFERENCES BETWEEN MEXICAN AND THE UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
    Years ended December 31,2005
    
    
    2004
    
    
    2003Net loss under Mexican GAAP
    
    Ps.
    (71,239
    )
    
    Ps.
    (133,303
    )
    
    Ps.
    (399,115
    )Adjustments:Amortization of pre-operating expenses (a)
    
    
    36,302
    
    
    
    36,616
    
    
    
    37,319Capitalization of interest (b)
    
    
    (1,122
    )
    
    
    (779
    )
    
    
    (500
    )Amortization of capitalized interest (b)
    
    
    2,594
    
    
    
    1,782
    
    
    
    1,001Amortization of frequency rights (c)
    
    
    
    
    
    
    
    
    
    
    11,892Installation revenues and related costs (d)
    
    
    3,006
    
    
    
    (20,249
    )
    
    
    (33,454
    )Installation costs not charged to customers (e)
    
    
    (64,292
    )
    
    
    (65,772
    )
    
    
    (51,811
    )Debt restructuring (f)
    
    
    48,616
    
    
    
    1,403,473
    
    
    
    22,884Capitalized internal compensation cost (g)
    
    
    132
    
    
    
    132
    
    
    
    132Spin-off and
sale of subsidiary
    
    
    217,925
    
    
    
    
    
    
    
    Total US GAAP adjustments
    
    
    243,161
    
    
    
    1,355,203
    
    
    
    (12,537
    )Net income (loss) under US GAAP
    
    Ps.
    171,922
    
    
    Ps.
    1,221,900
    
    
    Ps.
    (411,652
    )Weighted-average common shares
outstanding, basic
    
    
    13,370,478
    
    
    
    14,806,980
    
    
    
    14,654,063Weighted-average common shares
outstanding, diluted
    
    
    15,440,478
    
    
    
    16,771,543
    
    
    
    16,530,626Net income (loss) per share under
US GAAP, basic
    
    Ps.
    12.86
    
    
    Ps.
    82.52
    
    
    Ps.
    (28.09
    )Net income (loss) per share under
US GAAP, diluted
    
    Ps.
    11.13
    
    
    Ps.
    72.86
    
    
    Ps.
    (24.90
    )
 F-43




---



##### Table of Contents



BALANCE AS OF DECEMBER 31,
 2005
    
    
    2004Shareholders equity (deficit) under Mexican
GAAP
    
    Ps.
    1,783,846
    
    
    Ps.
    1,637,160Accumulated adjustments:Preoperating expenses (a)
    
    
    (363,036
    )
    
    
    (363,036
    )Amortization of preoperating expenses (a)
    
    
    242,284
    
    
    
    205,982Capitalization of interest (b)
    
    
    66,639
    
    
    
    67,761Amortization of capitalized interest (b)
    
    
    (12,333
    )
    
    
    (14,927
    )Amortization of frequency rights (c)
    
    
    
    
    
    
    Installation revenues and related costs (d)
    
    
    (63,059
    )
    
    
    (66,065
    )Installation costs not charged to customers (e)
    
    
    (286,954
    )
    
    
    (222,662
    )Debt restructuring (f)
    
    
    (182,473
    )
    
    
    (231,089
    )Capitalized internal compensation cost (g)
    
    
    (2,250
    )
    
    
    (2,382
    )Total US GAAP adjustments
    
    Ps.
    (601,182
    )
    
    Ps.
    (626,418
    )Shareholders equity (deficit) under US GAAP
    
    Ps.
    1,182,664
    
    
    Ps.
    1,010,742
  Year ended December 31,2005
    
    
    2004Balance at the beginning of the year
    
    Ps.
    1,010,742
    
    
    Ps.
    (413,664
    )Net income (loss) under US GAAP
    
    
    (46,003
    )
    
    
    1,221,900Increase in capital stock
    
    
    
    
    
    
    202,506Balance at the end of the year
    
    Ps.
    1,182.664
    
    
    Ps.
    1,010,742
       F-44




---



##### Table of Contents



3 4 3 4 3 4
  (a)
    
    The exchange with the primary holder is accounted for as a combination of types
as the primary holder received both New Senior Notes and stock in exchange for the Old
Senior Notes exchanged. A gain was recorded, as the adjusted carrying value of the Old
Senior Notes exchanged was greater than the total future cash payments of the New
Senior Notes at the time of the exchange. To calculate the gain on the restructuring,
the carrying value of the Old Senior Notes was reduced by the fair value of the equity
interest granted as well as all legal and other costs in relation to the restructuring,
to determine the adjusted carrying value, which was compared to the gross future cash
payments under the terms of the New Senior Notes to determine the gain.
 F-45




---



##### Table of Contents



(b)
    
    The other holders exchanged Old Senior Notes for New Senior Notes, which is
accounted for as a modification of terms under FAS 15 due to the extension of the
maturity date and the increase in total interest payments. Since the carrying amount of
the Old Senior Notes on October 8, 2004 did not exceed the total future cash payments
of the New Senior Notes, no gain on the exchange with the other holders was recognized.Interest expense on the New Senior Notes provided to other holders is determined
using an effective interest rate that equates the present value of the future cash
payments specified by the New Senior Notes, with the carrying amount of the Old
Senior Notes.
           F-46




---



##### Table of Contents



December 31, 2005
 SFAS 109
    
    
    SFAS 109applied to
    
    
    applied toMexican GAAP
    
    
    US GAAPBalances
    
    
    Balances
    
    
    TotalDeferred assets:Allowance for doubtful accounts
    
    Ps.
    24,146
    
    
    
    
    
    
    Ps.
    24,146Asset tax payments
    
    
    33,227
    
    
    
    
    
    
    
    33,227Tax loss carryforwards
    
    
    95,930
    
    
    
    
    
    
    
    95,930Accruals
    
    
    70,410
    
    
    
    
    
    
    
    70,410Installation revenues
    
    
    
    
    
    
    17,657
    
    
    
    17,657Deferred tax assets
    
    
    223,713
    
    
    
    17,657
    
    
    
    241,370Deferred liabilities:Prepaid expenses
    
    
    (29,905
    )
    
    
    
    
    
    
    (29,905
    )Telephone network equipment and leasehold
improvements, frequency rights, intangible
assets and preoperating expenses
    
    
    (215,895
    )
    
    
    19,235
    
    
    
    (196,660
    )Installation costs
    
    
    
    
    
    
    80,347
    
    
    
    80,347Deferred tax liabilities
    
    
    (245,800
    )
    
    
    99.582
    
    
    
    (146.218
    )Net deferred income tax asset before valuation
allowance
    
    
    (22,087
    )
    
    
    117.239
    
    
    
    95.152Valuation allowance
    
    
    (3,884
    )
    
    
    (117.239
    )
    
    
    (121.123
    )Ps.
    (25,971
    )
    
    Ps.
    
    
    
    Ps.
    (25.971
    )
 December 31, 2004
 SFAS 109
    
    
    SFAS 109applied to
    
    
    applied toMexican GAAP
    
    
    US GAAPBalances
    
    
    Balances
    
    
    TotalDeferred assets:Allowance for doubtful accounts
    
    Ps.
    20,864
    
    
    
    
    
    
    Ps.
    20,864Asset tax payments
    
    
    33,247
    
    
    
    
    
    
    
    33,247Tax loss carryforwards
    
    
    1,077,244
    
    
    
    
    
    
    
    1,077,244Accruals
    
    
    72,362
    
    
    
    
    
    
    
    72,362Installation revenues
    
    
    
    
    
    
    21,141
    
    
    
    21,141Deferred tax assets
    
    
    1,203,717
    
    
    
    21,141
    
    
    
    1,224,858Deferred liabilities:Inventory
    
    
    (3,471
    )
    
    
    
    
    
    
    (3,471
    )Prepaid expenses
    
    
    (22,595
    )
    
    
    
    
    
    
    (22,595
    )Telephone network equipment and leasehold
improvements, frequency rights, intangible
assets and preoperating expenses
    
    
    (305,768
    )
    
    
    34,112
    
    
    
    (271,656
    )Installation costs
    
    
    
    
    
    
    71,252
    
    
    
    71,252Debt issuance costs on restructuring
    
    
    
    
    
    
    (5,406
    )
    
    
    (5,406
    )Deferred tax liabilities
    
    
    (332,103
    )
    
    
    99.958
    
    
    
    (232.145
    )Net deferred income tax asset before valuation
allowance
    
    
    871,614
    
    
    
    
    
    
    
    992.712Valuation allowance
    
    
    (871,614
    )
    
    
    
    
    
    
    (992,712
    )Ps.
    
    
    
    
    
    
    
    Ps.
    
 F-47




---



##### Table of Contents



F-48




---



##### Table of Contents



Year ended December 31,2005
    
    
    2004
    
    
    2003Operating activities:Net income (loss) under US GAAP
    
    
    171,922
    
    
    Ps.
    1,221,900
    
    
    Ps.
    (411,652
    )Adjustments to reconcile net income (loss) to
net cash flow provided by operating activities:Depreciation and amortization
    
    
    242,608
    
    
    
    334,334
    
    
    
    265,355Gain on restructuring of debt
    
    
    
    
    
    
    (1,347,930
    )
    
    
    Fixed asset write-offs
    
    
    11,479
    
    
    
    
    
    
    
    8,709Allowance for doubtful accounts
    
    
    28,625
    
    
    
    35,544
    
    
    
    55,324Monetary gain
    
    
    (22,090
    )
    
    
    (113,865
    )
    
    
    (90,794
    )Non recurring charges
    
    
    
    
    
    
    
    
    
    
    8Allowance for inventory of obsolescence
    
    
    306
    
    
    
    1,080
    
    
    
    3,795Deferred Income
Tax


25,971







Foreign currency exchange loss
    
    
    (18,141
    )
    
    
    102,229
    
    
    
    205,017440,680
    
    
    
    233,292
    
    
    
    35,762Changes in operating assets and liabilities:Accounts receivable
    
    
    (99,078
    )
    
    
    (3,750
    )
    
    
    (57,073
    )Inventory
    
    
    (4,021
    )
    
    
    6,298
    
    
    
    2,495Prepaid expenses
    
    
    (12,917
    )
    
    
    (13,745
    )
    
    
    (19,154
    )Accrued interest
    
    
    
    
    
    
    756
    
    
    
    Accrued expenses and other accounts payable
    
    
    143,926
    
    
    
    (77,439
    )
    
    
    61,452Cash flow provided by (used in) operating
activities
    
    
    468,590
    
    
    
    145,412
    
    
    
    18,492Financing activities:Restricted
cash
    
    
    11,173
    
    
    
    (18,845
    )
    
    
    Proceeds from loans and notes payable
    
    
    129,998
    
    
    
    163,184
    
    
    
    Cash flow provided by financing activities
    
    
    141,171
    
    
    
    144,339
    
    
    
    Investing activities:Acquisition of fixed assets
    
    
    (380,591
    )
    
    
    (247,547
    )
    
    
    (70,410
    )Other assets
    
    
    (55,154
    )
    
    
    
    
    
    
    (300
    )Cash flow used in investing activities
    
    
    (441,745
    )
    
    
    (247,547
    )
    
    
    (70,710
    )Cash and cash equivalents:Effect of inflation and exchange rate changes
on cash and cash equivalents
    
    
    (6,782
    )
    
    
    (25,381
    )
    
    
    (33,211
    )Net increase (decrease) increase in cash and cash
equivalents
    
    
    161,234
    
    
    
    16,823
    
    
    
    (85,427
    )Cash and cash equivalents at beginning of the year
    
    
    62,189
    
    
    
    45,366
    
    
    
    130,793Cash and cash equivalents at end of the year
    
    
    223,423
    
    
    
    62,189
    
    
    
    45,366
 F-49




---



##### Table of Contents



Year ended December 31,2005
    
    
    2004
    
    
    2003Interest paid
    
    Ps.
    69,994
    
    
    Ps.
    24,009
    
    
    Ps.
    22,445Taxes paid
    
    Ps.
    505
    
    
    Ps.
    13,535
    
    
    Ps.
    25,404Supplemental disclosures of non-cash
investing and financing activities:Capital stock issued in exchange for services
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.
    Capital stock issued in exchange for advertising
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.
    Reduction of notes payable from troubled
debt restructuring
    
    Ps.
    
    
    
    Ps.
    1,474,389
    
    
    Ps.
    
    F-50




---



##### Table of Contents



Accounting Changes and Error Corrections
 Determining the Amortization Period for Leasehold Improvements
  Accounting for Modifications to
Conversion Options Embedded in Debt Instruments and Related Issues. Income
Tax Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature., Accounting for Income Taxes.
 F-51




---



##### Table of Contents



ServiciosMaxcom
    
    
    Corporativo
    
    
    Servicios
    
    
    OOP
    
    

Financieros
    
    
    Elimination
    
    
    ConsolidatedBalance sheet as of December
31, 2005:Cash and cash equivalents and
Current restricted cash
    
    Ps.
    215,820
    
    
    
    654
    
    
    
    473
    
    
    
    82
    
    
    
    6,394
    
    
    
    
    
    
    
    223,423Accounts receivable  net
    
    
    144,070
    
    
    
    141
    
    
    
    12,423
    
    
    
    2,263
    
    
    
    193,888
    
    
    
    (136,377
    )
    
    
    216,408Inventory  net
    
    
    15,403
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,403Prepaid expenses
    
    
    75,769
    
    
    
    401
    
    
    
    609
    
    
    
    7
    
    
    
    6,474
    
    
    
    (6,476
    )
    
    
    76,784Restricted cash long term
    
    
    7,672
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,672Investment in subsidiaries
    
    
    206,471
    
    
    
    
    
    
    
    55
    
    
    
    
    
    
    
    
    
    
    
    (206,526
    )
    
    
    Frequency rights  net
    
    
    86,102
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    86,102Telephone network system and
Equipment net
    
    
    2,082,795
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,082,795Preoperating expenses  net
    
    
    122,305
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    122,305Retirement Obligations
    
    
    
    
    
    
    1,588
    
    
    
    13,210
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,798Intangible assets  net
    
    
    303,527
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    303,527Other assets
    
    
    5,954
    
    
    
    178
    
    
    
    2,076
    
    
    
    
    
    
    
    4,362
    
    
    
    (2,069
    )
    
    
    10,501Total assets
    
    Ps.
    3,265,888
    
    
    Ps.
    2,962
    
    
    Ps.
    28,846
    
    
    Ps.
    2,352
    
    
    Ps.
    211,118
    
    
    Ps.
    (351,448
    )
    
    Ps.
    3,159,718Total liabilities
    
    Ps.
    1,482,042
    
    
    Ps.
    4,861
    
    
    Ps.
    31,106
    
    
    Ps.
    2,297
    
    
    Ps.
    600
    
    
    Ps.
    (145,034
    )
    
    Ps.
    1,375,872Shareholders Equity:Capital
Stock and Additional
Paid-
In Capital
    
    
    2,964,229
    
    
    
    89
    
    
    
    61
    
    
    
    51
    
    
    
    213,215
    
    
    
    (213,416
    )
    
    
    2,964,229Accumulated deficit
    
    
    (1,180,383
    )
    
    
    (1,988
    )
    
    
    (2,321
    )
    
    
    4
    
    
    
    (2,697
    )
    
    
    7,002
    
    
    
    (1,180,383
    )Total shareholders equity
    
    
    1,783,846
    
    
    
    (1,899
    )
    
    
    (2,260
    )
    
    
    55
    
    
    
    210,518
    
    
    
    (206,414
    )
    
    
    1,783,846Total liabilities and
Shareholders
 ́equity
    
    Ps.
    3,265,888
    
    
    Ps.
    2,962
    
    
    Ps.
    28,846
    
    
    Ps.
    2,352
    
    
    Ps.
    211,118
    
    
    Ps.
    (351,448
    )
    
    Ps.
    3,159,718Total shareholders equity
under Mexican GAAP
    
    Ps.
    1,783,846
    
    
    Ps.
    (1,899
    )
    
    Ps.
    (2,260
    )
    
    Ps.
    55
    
    
    Ps.
    210,518
    
    
    Ps.
    (206,414
    )
    
    Ps.
    1,783,846
 F-52




---



##### Table of Contents



ServiciosMaxcom
    
    
    Corporativo
    
    
    Servicios
    
    
    OOP
    
    

Financieros
    
    
    Elimination
    
    
    ConsolidatedPreoperating expenses
    
    
    (363,036
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (363,036
    )Amortization of preoperating
expenses
    
    
    242,284
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    242,284Capitalization of interest
    
    
    66,639
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    66,639Amortization of capitalized
interest
    
    
    (12,333
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,333
    )Amortization of frequency rights
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (63,059
    )Installation revenues
    
    
    (63,059
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (286,954
    )Installation costs
    
    
    (286,954
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (182,473
    )Debt restructuring
    
    
    (182,473
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (182,473
    )Bonus capitalization
    
    
    (2,250
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,250
    )Deferred tax provisions
    
    
    (2,939
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,939
    )Retirement obligations
    
    
    675
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    675Total shareholders equity under
US. GAAP
    
    
    1,180,400
    
    
    
    (1,899
    )
    
    
    (2,260
    )
    
    
    55
    
    
    
    210,518
    
    
    
    (206,414
    )
    
    
    1,180,400
 ServiciosMaxcom
    
    
    Corporativo
    
    
    Servicios
    
    
    OOP
    
    

Finanacieros
    
    
    Elimination
    
    
    ConsolidatedStatements of Operations for
the year ended December 31,
2005:Revenues
    
    Ps.
    1,150,371
    
    
    Ps.
    38,155
    
    
    Ps.
    270,955
    
    
    
    
    
    
    
    
    
    
    Ps.
    (309,009
    )
    
    Ps.
    1,150,472Operating cost and expenses
    
    
    (1,133,357
    )
    
    
    (38,075
    )
    
    
    (271,057
    )
    
    
    23
    
    
    
    (213
    )
    
    
    309,009
    
    
    
    (1,133,670
    )Integral (cost) income of
financing
    
    
    (52,240
    )
    
    
    (2
    )
    
    
    17
    
    
    
    (38
    )
    
    
    (2,795
    )
    
    
    
    
    
    
    (55,058
    )Other income (expenses)
    
    
    (36,013
    )
    
    
    (230
    )
    
    
    1,823
    
    
    
    19
    
    
    
    311
    
    
    
    1,107
    
    
    
    (32,983
    )Net (loss) income
    
    Ps.
    (71,239
    )
    
    Ps.
    (152
    )
    
    Ps.
    1,738
    
    
    Ps.
    4
    
    
    Ps.
    (2,697
    )
    
    Ps.
    1,107
    
    
    Ps.
    (71,239
    )Net (loss) income for the year
under Mexican GAAP
    
    Ps.
    (71,239
    )
    
    Ps.
    (152
    )
    
    Ps.
    1,738
    
    
    Ps.
    4
    
    
    Ps.
    (2,697
    )
    
    Ps.
    1,107
    
    
    Ps.
    (71,239
    )Amortization of preoperating
expenses
    
    
    36,302
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,302Capitalization of interest
    
    
    (1,122
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,122
    )Amortization of capitalized
Interest
    
    
    2,594
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,594Amortization of frequency rightsInstallation revenues
    
    
    3,006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,006Installation costs
    
    
    (64,292
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (64,292
    )Debt restructuring
    
    
    48,616
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48,616Bonus capitalization
    
    
    132
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    132Deferred tax provisions
    
    
    (2,939
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,939
    )Retirement obligations
    
    
    675
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    675Net loss (income) for the year
Under U.S. GAAP
    
    Ps.
    (48,267
    )
    
    Ps.
    (152
    )
    
    Ps.
    1,738
    
    
    Ps.
    4
    
    
    Ps.
    (2,697
    )
    
    Ps.
    1,107
    
    
    Ps.
    (48,267
    )
 F-53




---



##### Table of Contents



Statement of
Cash Flows under U.S. GAAP for the Year Ended December 31,
2005:Net (loss)
income
    
    Ps.
    171,922
    
    
    Ps.
    (152
    )
    
    Ps.
    1,738
    
    
    Ps.
    4
    
    
    Ps.
    (2,697
    )
    
    Ps.
    1,107
    
    
    Ps.
    171,922Depreciation
and amortization
    
    
    242,608
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    242,608Other
adjustments to reconcile net income to cash provided by operating
activities
    
    
    26,150
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,150Net change
in working capital
    
    
    27,910
    
    
    
    (152
    )
    
    
    1,738
    
    
    
    4
    
    
    
    (2,697
    )
    
    
    1,107
    
    
    
    27,910Resources
(used in) provided by Operating activities
    
    
    670,730
    
    
    
    404
    
    
    
    (185
    )
    
    
    82
    
    
    
    6,394
    
    
    
    (208,844
    )
    
    
    468,590Resources
used in financing activities
    
    
    141,171
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    141,171Resources
(used in) provided by investing activities
    
    
    (650,589
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    208,844
    
    
    
    (441,745
    )Effect of
inflation on cash and cash equivalents
    
    
    (6,782
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,782
    )Cash and cash equivalents:Net increase (decrease) in cash
And cash equivalents
    
    
    154,540
    
    
    
    404
    
    
    
    (185
    )
    
    
    82
    
    
    
    6,394
    
    
    
    
    
    
    
    161,234Beginning balances
    
    
    61,280
    
    
    
    250
    
    
    
    658
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    62,189Ending balances
    
    Ps.
    215,820
    
    
    Ps.
    654
    
    
    Ps.
    473
    
    
    Ps.
    82
    
    
    Ps.
    6,394
    
    
    Ps.
    
    
    
    Ps.
    223,423
 Maxcom
    
    
    Corporativo
    
    
    Servicios
    
    
    Elimination
    
    
    ConsolidatedBalance sheet as of December
31, 2004:Cash and cash equivalents
    
    Ps.
    61,280
    
    
    Ps.
    250
    
    
    Ps.
    658
    
    
    Ps.
    
    
    
    Ps.
    62,188Current restricted cash
    
    
    5,740
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,740Accounts receivable  net
    
    
    152,317
    
    
    
    241
    
    
    
    14,788
    
    
    
    (13,420
    )
    
    
    153,926Inventory  net
    
    
    11,688
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,688Prepaid expenses
    
    
    65,538
    
    
    
    196
    
    
    
    461
    
    
    
    
    
    
    
    69,195Restricted cash long term
    
    
    13,105
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,105Frequency rights  net
    
    
    97,419
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    97,419Telephone network system and
equipment  net
    
    
    1,783,833
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,783,833Preoperating expenses  net
    
    
    158,607
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    158,607Intangible assets  net
    
    
    378,330
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    378,330Other assets
    
    
    21,438
    
    
    
    173
    
    
    
    
    
    
    
    
    
    
    
    21,611Total assets
    
    Ps.
    2,752,295
    
    
    Ps.
    860
    
    
    Ps.
    15,907
    
    
    Ps.
    (13,420
    )
    
    Ps.
    2,755,642Total liabilities
    
    Ps.
    1,115,136
    
    
    Ps.
    2,606
    
    
    Ps.
    19,905
    
    
    Ps.
    (19,164
    )
    
    Ps.
    1,118,483Shareholders Equity:Capital stock and additional
paid-in-capital
    
    
    3,396,451
    
    
    
    89
    
    
    
    61
    
    
    
    (150
    )
    
    
    3,396,451Accumulated deficit
    
    
    (1,759,292
    )
    
    
    (1,835
    )
    
    
    (4,059
    )
    
    
    5,894
    
    
    
    (1,759,292
    )Total shareholders equity
    
    
    1,637,159
    
    
    
    (1,746
    )
    
    
    (3,998
    )
    
    
    5,744
    
    
    
    1,637,159Total liabilities and
shareholders equity
    
    Ps.
    2,752,295
    
    
    Ps.
    860
    
    
    Ps.
    15,907
    
    
    Ps.
    (13,420
    )
    
    Ps.
    2,755,642Total shareholders equity
under Mexican GAAP
    
    Ps.
    1,637,159
    
    
    Ps.
    (1,746
    )
    
    Ps.
    (3,998
    )
    
    Ps.
    5,744
    
    
    Ps.
    1,637,159Preoperating expenses
    
    
    (363,036
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (363,036
    )Amortization of preoperating
expenses
    
    
    205,982
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    205,982Capitalization of interest
    
    
    67,761
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    67,761Amortization of capitalized
interest
    
    
    (14,927
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,927
    )Installation revenues
    
    
    (66,065
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (66,065
    )
 F-54




---



##### Table of Contents



Maxcom
    
    
    Corporativo
    
    
    Servicios
    
    
    Elimination
    
    
    ConsolidatedInstallation costs
    
    
    (222,662
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (222,662
    )Debt restructuring
    
    
    (231,088
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (231,088
    )Bonus capitalization
    
    
    (2,382
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,382
    )Total shareholders equity
under US GAAP
    
    Ps.
    1,010,742
    
    
    Ps.
    (1,746
    )
    
    Ps.
    (3,998
    )
    
    Ps.
    5,744
    
    
    Ps.
    1,010,742
 Maxcom
    
    
    Corporativo
    
    
    Servicios
    
    
    Elimination
    
    
    ConsolidatedStatements of Operations for
the year ended December 31,
2004:Revenues
    
    Ps.
    897,149
    
    
    Ps.
    31,030
    
    
    Ps.
    235,215
    
    
    Ps.
    (266,245
    )
    
    Ps.
    897,149Operating cost and expenses
    
    
    (1,051,009
    )
    
    
    (30,207
    )
    
    
    (234,551
    )
    
    
    266,245
    
    
    
    (1,049,522
    )Integral (cost) income of
financing
    
    
    48,666
    
    
    
    (43
    )
    
    
    235
    
    
    
    
    
    
    
    48,858Other income (expenses)
    
    
    (28,110
    )
    
    
    (640
    )
    
    
    (399
    )
    
    
    (640
    )
    
    
    (29,789
    )Net (loss) income
    
    Ps.
    (133,304
    )
    
    Ps.
    140
    
    
    Ps.
    500
    
    
    Ps.
    (640
    )
    
    Ps.
    (133,304
    )Net (loss) income for the year
Under Mexican GAAP
    
    Ps.
    (133,304
    )
    
    Ps.
    140
    
    
    Ps.
    500
    
    
    Ps.
    (640
    )
    
    Ps.
    (133,304
    )Amortization of preoperating
expenses
    
    
    36,616
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,616Capitalization of interest
    
    
    (778
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (778
    )Amortization of capitalized
interest
    
    
    1,781
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,781Installation revenues
    
    
    (20,249
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,249
    )Installation costs
    
    
    (65,772
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (65,772
    )Debt restructuring
    
    
    1,403,474
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,403,474Bonus Capitalization
    
    
    132
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    132Net loss (income) for the year
under US GAAP
    
    Ps.
    1,221,900
    
    
    Ps.
    140
    
    
    Ps.
    500
    
    
    (Ps.
    640
    )
    
    Ps.
    1,221,900Statement of Changes in
Financial Position for the Year
Ended December 31, 2004:Net (loss) income
    
    (Ps.
    133,304
    )
    
    Ps.
    140
    
    
    Ps.
    500
    
    
    (Ps.
    640
    )
    
    (Ps.
    133,304
    )Depreciation and amortization
    
    
    346,045
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    346,045Net change in working capital
    
    
    212,741
    
    
    
    140
    
    
    
    500
    
    
    
    (640
    )
    
    
    212,741Resources (used in) provided by
operating activities
    
    
    275,971
    
    
    
    147
    
    
    
    658
    
    
    
    
    
    
    
    276,714Financing activities:Issuance of capital stock
    
    
    595,945
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    595,945Additional paid in capital
    
    
    893,898
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    893,898Proceeds from loans and notes
payable
    
    
    (1,394,376
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,390,376
    )Resources used in financing
activities
    
    
    99,467
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    99,467Investing activities:Telephone network systems and
equipm
    
    
    (355,008
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (335,008
    )Intangible assets
    
    
    (33,348
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (33,348
    )Other assets
    
    
    8,988
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    8,996Resources (used in) provided by
investing activities
    
    
    (359,368
    )
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    (359,360
    )Cash and cash equivalents:
 F-55




---



##### Table of Contents



Maxcom
    
    
    Corporativo
    
    
    Servicios
    
    
    Elimination
    
    
    ConsolidatedBalance sheet as of
December 31, 2003:Cash and cash equivalents
and restricte
    
    Ps.
    45,270
    
    
    Ps.
    96
    
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.
    45,366Accounts receivable  net
    
    
    136,292
    
    
    
    183
    
    
    
    9,994
    
    
    
    (9,042
    )
    
    
    137,426Inventory  net
    
    
    20,056
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,056Prepaid expenses
    
    
    58,080
    
    
    
    119
    
    
    
    129
    
    
    
    
    
    
    
    58,328Frequency rights  net
    
    
    104,644
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    104,644Telephone network system
and equipme
    
    
    1,671,129
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,671,130Preoperating expenses  net
    
    
    195,247
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    195,247Intangible assets  net
    
    
    424,859
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    424,859Other assets
    
    
    30,425
    
    
    
    182
    
    
    
    
    
    
    
    
    
    
    
    30,607Total assets
    
    Ps.
    2,686,002
    
    
    Ps.
    580
    
    
    Ps.
    10,123
    
    
    (Ps.
    9,042
    )
    
    Ps.
    2,687,663Total liabilities
    
    Ps.
    2,405,382
    
    
    Ps.
    2,464
    
    
    Ps.
    14,622
    
    
    (Ps.
    15,426
    )
    
    Ps.
    2,407,043Shareholders Equity:Capital stock and
additional paid-in-capital
    
    
    1,906,608
    
    
    
    89
    
    
    
    61
    
    
    
    (150
    )
    
    
    1,906,608Accumulated deficit
    
    
    (1,625,988
    )
    
    
    (1,975
    )
    
    
    (4,559
    )
    
    
    6,534
    
    
    
    (1,625,988
    )Total shareholders equity
    
    
    280,620
    
    
    
    (1,886
    )
    
    
    (4,498
    )
    
    
    6,384
    
    
    
    280,620Total liabilities and
shareholders equity
    
    Ps.
    2,686,002
    
    
    Ps.
    580
    
    
    Ps.
    10,123
    
    
    (Ps.
    9,042
    )
    
    Ps.
    2,687,663Total shareholders equity
under Mexican GAAP
    
    Ps.
    280,620
    
    
    (Ps.
    1,886
    )
    
    (Ps.
    4,498
    )
    
    Ps.
    6,384
    
    
    Ps.
    280,620Preoperating expenses
    
    
    (363,036
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (363,036
    )Amortization of
preoperating expenses
    
    
    169,366
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    169,366Capitalization of interest
    
    
    68,540
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    68,540Amortization of capitalized
interest
    
    
    (16,709
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,709
    )Installation revenues
    
    
    (45,816
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (45,816
    )Installation costs
    
    
    (156,890
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (156,890
    )Debt restructuring
    
    
    (347,225
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (347,225
    )Bonus capitalization
    
    
    (2,514
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,514
    )Total shareholders equity
under US GA
    
    (Ps.
    413,664
    )
    
    (Ps.
    1,886
    )
    
    (Ps.
    4,498
    )
    
    (Ps.
    6,384
    )
    
    (Ps.
    413,664
    )Statements of Operations
for the year
ended December 31, 2003:Revenues
    
    Ps.
    832,211
    
    
    Ps.
    49,434
    
    
    Ps.
    200,599
    
    
    (Ps.
    250,032
    )
    
    Ps.
    832,212Operating cost and expenses
    
    
    (1,084,452
    )
    
    
    (49,489
    )
    
    
    (200,772
    )
    
    
    251,299
    
    
    
    (1,083,414
    )Integral (cost) income of
financing
    
    
    (134,020
    )
    
    
    86
    
    
    
    219
    
    
    
    
    
    
    
    (133,715
    )Other income (expenses)
    
    
    (12,854
    )
    
    
    (22
    )
    
    
    (666
    )
    
    
    (654
    )
    
    
    (14,196
    )Net (loss) income
    
    (Ps.
    399,115
    )
    
    (Ps.
    9
    )
    
    (Ps.
    620
    )
    
    (Ps.
    613
    )
    
    (Ps.
    399,113
    )
 F-56




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##### Table of Contents



Maxcom
    
    
    Corporativo
    
    
    Servicios
    
    
    Elimination
    
    
    ConsolidatedNet (loss) income for the year
under
Mexican GAAP
    
    (Ps.
    399,115
    )
    
    Ps.
    9
    
    
    (Ps.
    620
    )
    
    (Ps.
    613
    )
    
    (Ps.
    399,113
    )Amortization of preoperating
expenses
    
    
    37,319
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,319Capitalization of interest
    
    
    (500
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (500
    )Amortization of capitalized
interest
    
    
    1,001
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,001Amortization of frequency
rights
    
    
    11,892
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,892Installation revenues
    
    
    (33,454
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (33,454
    )Installation costs
    
    
    (51,811
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (51,811
    )Debt restructuring
    
    
    22,884
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,884Bonus capitalization
    
    
    132
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    132Net loss (income) for the year
under
US GAAP
    
    (Ps.
    411,652
        )
    
    Ps.
    9
    
    
    Ps.
    620
    
    
    Ps.
    613
    
    
    ((Ps.
    411,650
    )Statement of Changes in
Financial Position
for the Year Ended December
31, 2003:Net (loss) income
    
    (Ps.
    399,115
    )
    
    Ps.
    9
    
    
    (Ps.
    621
    )
    
    Ps.
    613
    
    
    (Ps.
    399,113
    )Depreciation and amortization
    
    
    365,411
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    365,411Net change in working capital
    
    
    (33,704
    )
    
    
    9
    
    
    
    (621
    )
    
    
    613
    
    
    
    (33,703
    )Resources (used in) provided
by operating activities
    
    
    (38,021
    )
    
    
    (8,020
    )
    
    
    (5,172
    )
    
    
    
    
    
    
    (51,213
    )Financing activities:Additional paid-in capital
    
    
    1,121
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,121Proceeds from loans and notes
payables
    
    
    100,930
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100,930Resources used in financing
activities
    
    
    102,051
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    102,051Investing activities:Telephone network systems and
equipm
    
    
    (118,784
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (118,784
    )Intangible assets
    
    
    (17,184
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,184
    )Other assets
    
    
    (307
    )
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    (299
    )Resources (used in) provided by
investing activities
    
    
    (136,275
    )
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    (136,267
    )Cash and cash equivalents:Net increase (decrease) in
cash and
cash equivalents
    
    
    (72,245
    )
    
    
    (8,011
    )
    
    
    (5,172
    )
    
    
    
    
    
    
    (85,429
    )Beginning balances
    
    
    117,515
    
    
    
    8,107
    
    
    
    5,172
    
    
    
    
    
    
    
    130,794Ending balances
    
    Ps.
    45,270
    
    
    Ps.
    96
    
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.
    45,366
   F-57




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##### Table of Contents



Balance at
    
    Charged tobeginning of
    
    cost and
    
    
    
    
    
    Balance at endperiod
    
    Expenses
    
    Deductions
    
    of periodAllowance for doubtful accounts
    
    
    2005
    
    
    Ps.
    65.2
    
    
    Ps.
    24.5
    
    
    Ps.
    (20.8
    )
    
    Ps.
    68.82004
    
    
    Ps.
    67.7
    
    
    Ps.
    36.5
    
    
    Ps.
    (39.0
    )
    
    Ps.
    65.22003
    
    
    Ps.
    36.3
    
    
    Ps.
    55.3
    
    
    Ps.
    (23.9
    )
    
    Ps.
    67.7Allowance for obsolete and slow-
moving supply inventories
    
    
    2005
    
    
    Ps.
    0.3
    
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.
    0.32004
    
    
    Ps.
    0.3
    
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.
    0.32003
    
    
    Ps.
    0.7
    
    
    Ps.
    
    
    
    Ps.
    (0.4
    )
    
    Ps.
    0.3Allowance for obsolete and slow-
moving network inventories
    
    
    2005
    
    
    Ps.
    9.3
    
    
    Ps.
    
    
    
    Ps.
    0.1
    
    
    Ps.
    9.42004
    
    
    Ps.
    10.4
    
    
    Ps.
    
    
    
    Ps.
    (1.1
    )
    
    Ps.
    9.32003
    
    
    Ps.
    14.3
    
    
    Ps.
    
    
    
    Ps.
    (3.9
    )
    
    Ps.
    10.4Allowance for lease penalty
    
    
    2005
    
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.
    2004
    
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.
    2003
    
    
    Ps.
    8.3
    
    
    Ps.
    
    
    
    Ps.
    (8.3
    )
    
    Ps.
    
 F-58




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##### Table of Contents



ITEM 18. EXHIBITS
 Page1.
    
    By-laws (estatutos) of Maxcom Telecomunicaciones, S.A. de C.V. as amended to
June 10, 2003.
    
    *****2(a)
    
    Not applicable.2(b)1.
    
    Indenture dated as of March 17, 2000 among Maxcom, Corporativo en
Telecomunicaciones, S.A. de C.V. and The Bank of New York, as Trustee.
    
    **2.
    
    Indenture dated as of April 29, 2002 among Maxcom, Corporativo en
Telecomunicaciones, S.A., de C.V., Maxcom Servicios Administrativos, S.A., de
C.V. and The Bank of New York, as Trustee.
    
    *3.
    
    Second Supplemental Indenture dated as of April 29, 2002 among Maxcom,
Corporativo en Telecomunicaciones, S.A. de C.V., Maxcom Servicios
Administrativos, S.A. de C.V. and the Bank of New York, as Trustee.
    
    *4.
    
    Amended and Restated Indenture, dated as of October 8, 2004 amoung Maxcom,
Corporativo en Telecomunicaciones S.A. de C.V., Maxcom Servicios
Administrativos, S.A. de C.V., Maxcom USA, Inc. and the Bank of New York, as
trustee.
    
    ******5.
    
    Indenture, dated as of October 8, 2004 among Maxcom, Corporativo en
Telecomunicaciones S.A. de C.V., Maxcom Servicios Administrativos, S.A. de
C.V., Maxcom USA, Inc. and the Bank of New York, as trustee.
    
    ******2(c)
    
    Not applicable.1.
    
    CPO Trust Agreement effective April 25, 2002 among Maxcom., its shareholders
and Banco Nacional de México, S.A., Institución de Banca Múltiple, Grupo
Financiero Banamex Accival, acting as trustee.
    
    *2.
    
    Second amended and Restated Securityholders Agreement entered into as of April
29, 2002 among Maxcom and certain existing and new securityholders.
    
    *4(a)
    
    Agreement for the use of infrastructure and installation of fiber optic cable
on the highways between Puebla and Mexico, dated August 18, 1998, between
Amaritel, S.A. de C.V. (the predecessor of Maxcom Telecomunicaciones, S.A. de
C.V.) and Iusatel, S.A. de C.V.
    
    **4(b)
    
    Interconnection Agreement for long distance services, dated January 22, 1999,
between Amaritel and Teléfonos de Mexico (Telmex) valid for a period of two
years between February 1, 1999 and January 1, 2001. The agreement establishes
that it would remain in effect after the expiration date if no further
agreement for its termination or renewal has been entered into, in accordance
with article 42 of the Mexican Telecommunications law.
    
    **4(c)
    
    Local Interconnection Service Agreement, dated November 24, 1998, between
Amaritel, S.A. de C.V. and Teléfonos de Mexico, S.A. de C.V.
    
    **4(d)
    
    Amendment to Local Interconnection Service Agreement, dated February 25, 1999,
between Amaritel, S.A. de C.V. and Teléfonos de Mexico, S.A. de C.V.,
originally entered into on November 24, 1998.
    
    **4(e)
    
    Metropolitan Network Capacity Sale Agreement, dated April 28, 2000, between
Maxcom Telecomunicaciones, S.A. de C.V. and Metro Net, S.A. de C.V. (including
amendment dated December 21, 2000).
    
    ***4(f)
    
    Telecommunications Service Agreement dated November 15, 1999, between Maxcom
and Teléfonos de México, S.A. de C.V.
    
    **4(g)
    
    Telecommunications Service Agreement dated March 9, 1999, between Maxcom and
Bestel S.A. de C.V., according to which Bestel will provide long distance and
private calls services to Maxcom.
    
    **4(h)
    
    Concession for the installation and operation of telecommunications services
granted to Amaritel, S.A. de C.V. by the Secretary of Telecommunications and
Transport on December 20, 1996.
    
    **4(i)
    
    Amendment to Concession for the installation and operation of
telecommunications services granted to Amaritel by the Secretary of
Telecommunications and Transport on December 20, 1996, dated September 8,
1999, extending the coverage of such concession to include various additional
municipalities of the State of Mexico.
    
    **
 E-1




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##### Table of Contents



Page4(j)
    
    Amendment to Concession for the installation and operation of
telecommunications services granted to Amaritel by the Secretary of
Telecommunications and Transport on December 20, 1996, dated December 7, 1999,
authorizing Maxcom to employ whatever technologies it deems appropriate in
providing telecommunications services to various municipalities.
    
    **4(k)
    
    Amendment to Annex A and B of Concession for the installation and operation of
telecommunications services granted to Amaritel, S.A. de C.V. by the Secretary
of Telecommunications and Transport on December 20, 1996, dated September 27,
2001, extending the coverage of such concession to include all of Mexico.
    
    **4(l)
    
    Concession for a public telecommunications network in Regions 3, 5 and 8
granted to Amaritel, S.A. de C.V. by the Secretary of Telecommunications and
Transport on April 29, 1998.
    
    **4(m)
    
    Concession for the operation of point-to-multipoint microwave
telecommunications services in Region 5 granted to Amaritel, S.A. de C.V. by
the Secretary of Telecommunications and Transport on April 23, 1998.
    
    **4(n)
    
    Concession for the operation of point-to-multipoint microwave
telecommunications services in Region 3 granted to Amaritel, S.A. de C.V. by
the Secretary of Telecommunications and Transport on April 23, 1998.
    
    **4(o)
    
    Concession for the operation of point-to multipoint microwave
telecommunications services in Region 8 granted to Amaritel, S.A. de C.V. by
the Secretary of Telecommunications and Transport on April 29, 1998.
    
    **4(p)
    
    Concessions for the nationwide operation of point-to-point microwave
telecommunications services using five frequency bands in the 56 MHz
bandwidth, each granted to Amaritel, S.A. de C.V. by the Secretary of
Telecommunications and Transport on June 4, 1998.
    
    **4(q)
    
    Concessions for the nationwide operation of point-to-point microwave
telecommunications services using two frequency bands in the 100 MHz
bandwidth, each granted to Amaritel, S.A. de C.V. by the Secretary of
Telecommunications and Transport on June 4, 1998.
    
    **4(r)
    
    Amendment to Concession for the operation of point-to-multipoint
telecommunications services in Regions 3, 5, 8 granted to Amaritel, S.A. de
C.V. by the Secretary of Telecommunications and Transport on April 1, 1998,
dated October 12, 1999, regarding the start date for the initiation of
services.
    
    **4(s)
    
    Amendment to Concession for the installation and operation of
telecommunications services granted to Amaritel, S.A. de C.V. by the Secretary
of Telecommunications and Transport on December 20, 1996, dated September 24,
1999 eliminating financial restrictions.
    
    **4(t)
    
    Warrant Agreement dated as of March 17, 2000 between Maxcom
Telecomunicaciones, S.A. de C.V. and The Bank of New York, acting as warrant
agent.
    
    ***4(u)
    
    Dark fiber optic purchase agreement dated as of August 13, 2002 between Maxcom
Telecomunicaciones, S.A. de C.V. and Bestel S.A. de C.V.
    
    ****4(v)
    
    Transactional Lease Termination Agreement dated as of May 20, 2003 among
Maxcom Telecomunicaciones, S.A. de C.V. and Jacobo Zaga Romano, Jacobo Zaga
Buzali, et.al..
    
    ****4(w)
    
    Capacity sale agreement dates as of October 15, 2003, between Maxcom
Telecomunicaciones, S.A. de C.V. and Axtel, S.A. de C.V. [xxx].
    
    *****4(x)
    
    Credit Agreement dated April 28, 2004 by and among Banco Santander Mexicano,
S.A. Institución de Banca Mútiple Grupo Financiero Santander Servin, as
Lender, and Maxcom, as Borrower.
    
    *******4(y)
    
    Credit Agreement dated April 13, 2005 by and among Ixe Banco, S.A.,
Institución de Banca Mútiple, Ixe Grupo Financiero., as Lende, and Maxcom, as
Borrower.
    
    *******4(z)
    
    Amendment dated August 5, 2004 to Exhibit B of the Master Agreement to
Supply Local Interconnection Services, dated February 25, 1999 between Maxcom
and Telefonos de Mexico, S.A. de C.V.
    
    *******4(aa)
    
    Credit Agreement dated April 13, 2005 by and among Ixe Banco, S.A.,
Institución de Banca Múltiple, Ixe Grupo Financiero, as Lender, and Maxcom, as
Borrower4(bb)
    
    Credit Agreement dated October 25, 2005 by and among Ixe Banco, S.A.,
Institución de Banca Múltiple, Ixe Grupo Financiero, as Lender, Maxcom, as
Borrower and Maxcom SF, S.A. de C.V. as joint and several obligor and
amendment dated December 13, 2005
 E-2




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##### Table of Contents



Page4(cc)
    
    Credit Agreement dated October 21, 2005 by and among Banco Mercantil del
Norte, S.A., Institución de Banca Múltiple, Grupo Financiero Banorte, as
Lender and Maxcom, as Borrower4(dd)
    
    Irrevocable Trust Agreement dated November 21, 2005 by and among Maxcom, as
Settlor, Banco Mercantil del Norte, S.A., Institución de Banca Múltiple, Grupo
Financiero Banorte and Ixe Banco, S.A., Institución de Banca Múltiple, Ixe
Grupo Financiero, as trust beneficiaries and HSBC México, S.A., Institución de
Banca Múltiple, Grupo Financiero HSBC, Trust Division, as trustee4(ee)
    
    Maxcom Shareholders Meeting dated August 31, 2005 approving the spin-off4(ff)
    
    Stock Purchase Agreement dated November 22, 2005 by and among Maxcom and
Maxcom SF, S.A. de C.V., as Sellers and Tiendas Comercial Mexicana, S.A. de
C.V. and Controladora Comercial Mexicana, S.A. de C.V. , as Buyers.5.
    
    Not applicable.8.
    
    No significant subsidiaries.9.
    
    Not applicable.10.
    
    None.11.
    
    Maxcoms Code of Ethics adopted March, 2006.12.1
    
    Certification of the Chief Executive Officer pursuant to Rule 13a-14(a).12.2
    
    Certification of the Chief Financial Officer pursuant to Rule 13a-14(a).13.1
    
    Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 135013.2
    
    Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 135099.1
    
    Computation of earnings per share.99.2
    
    Computation of ratio of earnings to fixed charges.
 
 *
    
    Previously filed with annual report on Form 20-F, submitted to the SEC on July 1, 2002.**
    
    Previously filed with Registration Statement on Form F-4 NO. 333-11910 submitted on May 5, 2000.***
    
    Previously filed with annual report on Form 20-F, as amended, submitted on June 29, 2001 and on September 28, 2001.****
    
    Previously filed with annual report on Form 20-F, submitted to the SEC on June 30, 2003.§§§§§
    
    Previously filed with annual report on Form 20-F, submitted to the SEC on June 29, 2004.******
    
    Previously filed with annual report on form 20-F, submitted to he SEC on June 30, 2005.[xxx]
    
    Certain material has been omitted pursuant to a request for confidential treatment request. The places in this document where material has been omitted
is marked with a asterisk and brackets [*]. The omitted material has been filed separately with the SEC pursuant to Rule 24b-2 under the Securities
Exchange Act of 1934. E-3




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##### Table of Contents



GLOSSARY OF TELECOMMUNICATIONS TERMS
 ADSL
    
    (Asymetrical Digital Subscriber Line) ADSL is a
physical-layer protocol that supports up to 8
Mbps bandwidth downstream and up to 1 Mbps
upstream. The asymmetrical aspect of ADSL
technology makes it ideal for Internet browsing,
video on demand, and remote LAN access. Users of
these applications typically download more
information than they send. ADSL also allows
simultaneous voice communication by transmitting
data signals outside of the voice frequency
range.Band
    
    A range of frequencies between two defined limits.Bandwidth
    
    The relative range of analog frequencies or
digital signals that can be passed through a
transmission medium, such as glass fibers,
without distortion. The greater the bandwidth,
the greater the information carrying capacity.
Bandwidth is measured in Hertz (analog) or Bits
Per Second (digital).Capacity
    
    Refers to the ability to transmit voice or data
over telecommunications networksCarrier
    
    A licensed provider of telecommunications
transmission services by fiber, wire or radio.Centrex service
    
    A business telephone service developed originally
by Lucent Technologies which offers private
branch exchange type features directly from the
local telephone company central office, such as
voicemail, call pick-up group, abbreviated
dialing and multi-line hunting.Churn
    
    Refers to customer line attrition and is measured
as the percentage of disconnects from service
relative to the total subscriber base over a
given period of time.COFETEL
    
    Comisión Federal de Telecomunicaciones, the
Mexican Federal Telecommunications Commission.Digital
    
    Describes a method of storing, processing and
transmitting information through the use of
distinct electronic or optical pulses that
represent the binary digits 0 and 1. Digital
transmission / switching technologies employ a
sequence of discrete, distinct pulses to
represent information, as opposed to the
continuously variable analog signal.DSLAM
    
    Digital Subscriber Line Access Multiplexer. A
technology to concentrate traffic in ADSL
implementations through time division
multiplexing at the central office.E1
    
    A digital telephony format that carries data at
the rate of 2.048 Mbps (DS-1 level). E-1 is the
European and Latin American version of North
American T-1, though T-1 is 1.544 Mbps.Fiber optic technology
    
    Fiber optic systems use laser-generated light to
transmit voice, data and video in digital format
through ultra-thin strands of glass. Fiber optic
systems are characterized by large circuit
capacity, good sound quality, resistance to
external signal interference and direct interface
to digital switching equipment and digital
microwave systems. A pair of fiber optic strands
using advanced transmission technologies is
capable of carrying multiple 2.5 or 10 Gbps
communication streams. Because optical signals
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disperse over distance, they must be regenerated
/ amplified at sites located along the fiber
optic cable. Fiber optic systems using earlier
eneration fiber require frequent intervals
between regeneration / amplifier sites. Greater
distances between regeneration / amplifier sites
afforded by the use of advanced fiber generally
translate into substantially lower installation
and operating costs and fewer potential points of
failure.Fixed wireless local loop
    
    A wireless local telephony service using the
3.4-3.7 GHz frequency band.FTTH
    
    Fiber-to-the-home, reference to an all
fiber-optic public telephone network design,
where broadband services are delivered to the
customer premises / network interface by fiber
optic.Gbps
    
    Gigabits per second. A measurement of speed for
digital signal transmission expressed in billions
of bits per second (Gbps).Gulf region
    
    115 cities and towns in eleven states in eastern
Mexico, which includes the cities of Puebla,
Tampico, Veracruz, Reynosa, Cancún, Chetumal,
Mérida, Ciudad del Carmen, Campeche,
Coatzacoalcos and Tuxtla Gutiérrez, among others.Hertz
    
    The unit measuring the frequency with which an
alternating electromagnetic signal cycles through
the zero-value state between lowest and highest
states. One hertz (abbreviated Hz) equals one
cycle per second. KHz (kilohertz) stands for
thousands of hertz; MHz (megahertz) stands for
millions of hertz and GHz (gigahertz) stands for
billions of hertz.ISDN
    
    Integrated Services Digital Network. ISDN is an
international standard that provides end-to-end
digital connectivity to support a wide range of
voice, data and video services.Kbps
    
    Kilobits per second, a measurement of speed for
digital signal transmission expressed in
thousands of bits per second.Lambdas
    
    Lambdas are used as the symbol for wavelength in
lightwave systems. Fiber optic systems may use
multiple wavelengths of light, with each range of
wavelengths appearing in a window, roughly
corresponding to a color in the visible light
spectrum.LAN
    
    Local area network, a private data communications
network linking a variety of data devices, such
as computer terminals, personal computer
terminals, personal computers and microcomputers,
all housed in a defined building, plant or
geographic area.Microwave technology
    
    Although limited in capacity compared with fiber
optic systems, digital microwave systems offer an
effective and reliable means of transmitting
lower volume and narrower bandwidths of voice,
data and video signals over short and
intermediate distances. Microwaves are very high
frequency radio waves that can be reflected,
focused and beamed in a line-of-sight
transmission path. As a result of their
electro-physical properties, microwaves can be
used to transmit signals through the air, with
relatively little power. To create a
communications circuit, microwave signals are
transmitted through a focusing antenna, received
by an antenna at the next station in the network,
then amplified and retransmitted. Because
microwaves disperse as they travel through the
air, this transmission process must be repeated
at repeater stations, which consist of radio
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equipment, antennae and back-up power sources,
located on average every 30 kilometers along the
transmission route.Mbps
    
    MegaBits per second. A measurement of speed for
digital signal transmission expressed in millions
of bits per second (Mbps).Multi-line hunting
    
    A value-added service that allows for multiple
calls to be received with a single telephone
number.PCS
    
    Personal Communications Services. PCS has come
to represent two things: first, a digital
wireless communications service operating over
the 1.9 GHz band; and second, more generically, a
wireless communications service utilizing a
digital network that offers typical features such
as voice, video and data applications, short
messaging, voicemail, caller identification, call
conferencing and call forwarding. Generic PCS
suppliers promote this service on the ability of
its features to be customized, or bundled, to
the needs of the individual customers.Point-to-multipoint
microwave transmission
    
    A transmission using microwave technology by
which a single signal goes from one origination
point to many destination points.Point-to-point microwave
transmission
    
    A transmission using microwave technology by
which a signal goes from one point to another,
usually connected by some dedicated transmission
line.POTS
    
    Plain Old Telephone Service. The basic service
supplying standard single line telephones,
telephone lines and access to the public switched
network.SCT
    
    Secretaría de Comunicaciones y Transportes, the
Mexican Communications and Transportation
Ministry.Switch
    
    A device that opens or closes circuits or selects
the paths or circuits to be used for transmission
of information. Switching is the process of
interconnecting circuits to form a transmission
path between users.Teledensity
    
    Teledensity is a measure of telephony service in
a population. It is calculated by dividing the
total subscriber base (number of lines in
service) by the inhabitants and multiplying by
100. It is generally used as a comparative
measure of network development. All teledensity
figures are reported in subscribers per 100
inhabitants.Triple play services
    
    Triple play services consist combination of
voice, data, and video services offered as a
bundled service for a price that is less than the
price of the individual services acquired
individually.VoIP
    
    Voice over Internet Protocol services consist in
the technology that provides telephone companies
with the ability to carry normal telephony-style
voice over an Internet Protocol-based Internet
with POTS-like functionality, reliability, and
voice quality.VPN
    
    Virtual Private Network. A network design
offering the appearance and functionality of a
dedicated private network.Web-hosting
    
    A service performed by Internet service providers
(also known as ISPs) and Internet access
providers (also known as IAPs) consisting in the
hosting of outside companies web pages to be
displayed on the Internet.
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xDSL
    
    XDSL is a physical-layer protocol that supports
bandwidth downstream and upstream.
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SIGNATURES
  MAXCOM TELECOMUNICACIONES, S.A. DE
C.V.By:
    /s/ JOSE ANTONIO SOLBESJosé Antonio SolbesChief Financial Officer  E-1